* Dollar index up nearly 1 pct this week
* Buying muted in China after New Year break
* GRAPHIC-2018 asset returns: (Recasts throughout; updates prices; adds comment, NEW YORK to dateline)
By Renita D. Young and Jan Harvey
NEW YORK/LONDON, Feb 23 (Reuters) - Gold eased on Friday, heading towards its biggest weekly decline in 2-1/2 months, as the U.S. dollar climbed from last week's three-year low on the back of higher U.S. Treasury yields.
Bullion has come under heavy pressure this week from a recovery in the greenback and expectations that the U.S. Federal Reserve will press ahead with interest rate increases this year, which tend to weigh on non-yielding gold.
Rising U.S. yields have put the dollar on track for its second biggest weekly gain of the year. Stocks have also steadied after recent sharp losses.Spot gold was down 0.2 percent at $1,328.74 by 1:37 p.m. EST (1837 GMT), its fifth losing session in six. U.S. April gold futures settled down $2.40, or 0.2 percent, at $1,330.30 per ounce.
Spot prices have shed 1.4 percent this week, their biggest weekly decline since early December, after failing to sustain a brief push back above $1,360 an ounce last Friday.
"(Recent) multi-year highs in yields is definitely a factor for metals today," said Mike O'Donnell, markets strategist at RJO Futures.
U.S. Treasury prices gained on Friday and though benchmark 10-year U.S. Treasury yields slipped, they held near a four-year high reached on Wednesday. Bonds were also supported by the completion of $258 billion in new supply this week, which was the second largest ever over a three-day period. A weak euro also pressured gold. "Further weakness in gold and the euro could be the start of a fresh trend and caution for bulls is in order," said Friedberg Mercantile Group's Sholom Sanik.Minutes of the Fed's latest rate-setting meeting were released this week and emphasized confidence in the need to keep raising interest rates.
"Despite the hawkish stance by the Fed, which drove this move in the gold price, we are still above the $1,300 mark," said Think Markets' chief market analyst Naeem Aslam, flagging a key support level.
"We think some participants were surprised and unprepared, which created the largest weekly loss for this year."
On the physical gold markets, traders said buying was muted in China after the week-long Lunar New Year holiday that closed financial markets until Thursday.
Meanwhile, palladium increased 0.8 percent at $1,046.60 per ounce, likely boosted on industrial demand for catalytic converters in gasoline-burning vehicles, traders said. The metal was relatively flat from the prior week.
Silver dropped 0.6 percent at $16.51 an ounce, heading for a 0.9 percent weekly decline. Platinum gained 0.2 percent at $995.80 an ounce, but was down 0.6 percent on the week.
(Additional reporting by Eileen Soreng in Bengaluru; Editing by David Goodman and Chizu Nomiyama)
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