* Gold falls 1 percent
* Palladium prices hit lowest since Dec. 8
* U.S. dollar turns flat
(Recasts throughout; updates prices, headline; adds comment, NEW YORK to dateline)
By Renita D. Young and Eric Onstad
NEW YORK/LONDON, Feb 6 (Reuters) - Gold prices fell 1 percent to a 2-1/2-week low on Tuesday, as investors focused on expectations for higher U.S. interest rates, even as U.S. stock markets swung wildly in both directions a day after the Dow and S&P 500 indexes tumbled.
Spot gold was down 1 percent at $1,326.51 an ounce by 2:41 p.m. EST (1941 GMT), erasing Monday's 0.5 percent gain, having earlier dropped to $1,325.61, its lowest since Jan. 18.
U.S. gold futures for April delivery settled down $7, or 0.5 percent, at $1,329.50 per ounce.
"Gold is looking at higher interest rates today," said Walter Pehowich, executive vice president of investment services at Dillon Gage Metals.
Strength in the U.S. dollar index weighed on gold prices earlier, when world stock markets extended their sell-off. The greenback later turned flat.A stronger dollar typically makes commodities priced in the greenback more expensive for buyers using other currencies.
Gold saw no safe-haven boost from tumbling equity markets this week because the U.S. economy is still seen as robust and shares are expected to rebound, traders said.
"When the dollar and Treasury yields went up, gold had no place to go and it wasn't the safe haven that everybody was looking forward to. When the stock market sold off, the dollar seemed to be getting all the activity instead of gold," Pehowich said.
Markets had been anticipating up to four U.S. interest rate hikes this year. However, the economy may not be as strong as forecast, Pehowich said, reducing the need for such aggressive action.
Higher interest rates make gold a less attractive investment because it pays no interest.
"Long-term, when the Fed looks like it will be more data-dependent and maybe Fed rate hikes would be down to two, gold could benefit," Pehowich added.
Gold investors, frustrated that their bullish positions were not seeing gains, probably took profits, said Rob Haworth, senior investment strategist for U.S. Bank Wealth Management.
"When we look at the fundamental data, it's really quite positive. We don't think we're seeing a crash (in equities) because of a sell-off. It's quite plausible the market is looking to take their safe havens off the table and enter a risk-on environment," he said.
Spot silver dropped 0.9 percent to $16.59 per ounce.
Platinum fell 0.5 percent to $984.50 per ounce after hitting a three-week low of $979.74. Palladium shed 2.4 percent to $1,005.30 per ounce after touching $999.22, its lowest since Dec. 8.
(Additional reporting by Nithin Prasad and Nallur Sethuraman in Bengaluru; editing by Mark Heinrich and Rosalba O'Brien)
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