* Gold jumped 1.5 pct overnight after airliner downed
* Dollar up 0.1 pct vs basket of currencies
* Palladium trades near 2001 highs on Russia sanctions (Updates prices, adds comment)
By Clara Denina
LONDON, July 18 (Reuters) - Gold dropped around 1 percent on Friday, leaving it set for its first down week in seven, on prospects for higher U.S. interest rates and as investors took profits after a 1.5 percent jump on the downing of a passenger plane in eastern Ukraine.
Gold, seen as a hedge against risk in times of geopolitical and financial uncertainty, posted its biggest daily gain in a month on Thursday, as some investors sought protection against any drop in equities after the loss of the Malaysian airliner.
“In general what we have seen it’s a little bit of buying around geopolitical events, which has been supporting prices but is often short-lived,” Credit Suisse analyst Karim Cherif said.
“But overall, investors are not worried about substantial risks of currency weakness or higher inflation and that is ultimately keeping gold in tight ranges for long periods of time.”
Spot gold slipped 0.9 percent to $1,306.30 an ounce by 1430 GMT, undermined by a stronger dollar and concerns that the Federal Reserve could raise U.S. interest rates sooner than expected.
U.S. gold futures for August delivery were down 0.7 percent at $1,307.40 an ounce.
“We may still see gold remaining above $1,300 today but the strong selling seen at the start of the week indicates there is some pressure from market participants to liquidate the metal and push prices lower,” Quantitative Commodity Research director Peter Fertig said.
European shares extended Thursday’s losses, while U.S. stocks opened slightly higher and the dollar rose 0.1 percent against a basket of currencies after declining in the previous session, despite a fall in U.S. consumer sentiment in early July.
The market will continue to focus on U.S. economic data after Fed Chair Janet Yellen said on Tuesday the U.S. central bank could raise rates earlier or faster if hiring and wages take off in an unexpected way.
Higher interest rates would encourage investors to switch to assets that, unlike gold, pay interest.
“Gold is facing two significant obstacle blocks,” UBS said in a note. “Firstly, backers are likely to be hesitant to add fresh length given gold’s painful and costly retreat earlier this week.”
Secondly, safe-haven driven rallies this year have been short-lived, it added. “Both the Ukraine and Iraqi crises have encouraged gold buying this year, but the impact has been inconsistent and moderate.”
As a gauge of investor sentiment, holdings in the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, fell 2.69 tonnes to 803.34 tonnes on Thursday.
Palladium fell 0.4 percent to $877.50 an ounce but remained near its highest since 2001, after the United States imposed its toughest sanctions yet on Russia, the biggest producer of the metal, over the violence in Ukraine.
Spot platinum was down 0.3 percent at $1,488.00 an ounce and silver fell 1.2 percent to $20.77 an ounce, having gained almost 2 percent on Thursday. (Additional reporting by A. Ananthalakshmi in Singapore; Editing by William Hardy and David Holmes)