(Updated in New York afternoon time)

* Fed funds futures show 35% chance of September hike, down

from 40% on Wednesday

* July producer prices are unchanged after revised 0.1% drop

in June

* Dollar index edges up 0.02% to 99.96 after briefly falling

to 99.80

By Karen Brettell

NEW YORK, Aug 13 (Reuters) - The U.S. dollar was mixed on

Thursday after data showed that producer prices were unchanged

in July, leading traders to further pare bets on a September

Federal Reserve interest rate hike.

The flat reading in the Producer Price Index for final demand

last month followed a revised 0.1% drop in June. Economists

polled by Reuters had forecast the PPI rebounding 0.2%.

It comes after Wednesday's consumer price inflation report

showed that U.S. consumer prices barely increased last month.

Noel Dixon, senior macro strategist at State Street, said

the components of Thursday's report that feed into the personal

consumption expenditures data due later this month suggest that

the report "should be pretty good."

"My takeaway from that number and yesterday's number is that

it helps to make the case for the Fed staying on hold in

September," Dixon said.

Fed funds futures now show a 35% probability of a September

hike, down from 40% on Wednesday and 55% a week earlier.

The dollar index, which measures the greenback

against a basket of currencies including the yen and the euro,

rose 0.02% to 99.96, after earlier falling to 99.80 in the

aftermath of the PPI report. The euro gained 0.03% to

$1.1528.

Traders have been weighing whether the Fed will need to

raise rates as inflation remains stubbornly above the central

bank's 2% target and oil prices climb amid Iran-related

disruptions in the Strait of Hormuz.

Oil prices pared losses to less than 1% after dropping more

than 3% earlier on Thursday, as reports that Yemen's Houthis had

targeted a Saudi Aramco refinery with drones renewed concerns

over supply disruptions in an already tight global market.

Other data on Thursday showed that the number of Americans

filing claims for unemployment benefits increased moderately

last week, suggesting that the labor market remains stable

despite July's surprise job losses. Retail sales data on Friday

will be the next test of U.S. economic strength.

The Japanese yen weakened 0.04% to 159.48 per

dollar.

The Japanese currency has given back some of the gains from last

month's historic joint intervention by the U.S. and Japan. That

intervention has fueled market bets that the Bank of Japan will

need to hike rates faster and further, raising the stakes for

the currency heading into next month's policy meeting.

"I don't think it's scared away investors from continuing to

fade the yen unless we get the BOJ to deliver in September, and

have an increase in hawkish guidance," said Dixon.

The pound weakened 0.08% to $1.3481. The UK economy

unexpectedly grew in June, thanks to a dip in energy prices,

along with the start of the men's soccer World Cup and hot

weather.

The Norwegian crown weakened after Norges Bank left interest

rates unchanged, as expected, while flagging that inflation had

softened recently. At 4.25%, Norway holds one of the highest

interest rates among the 10 most developed economies, and its

status as an oil and gas exporter has given the crown a boost

this year.

Against the Norwegian crown, the dollar strengthened

0.24% to 9.51.