* Fed holds interest rates steady

* U.S. dollar falls against euro after rate decision

* Oil gains as US-Iran tension escalates after Iraq strikes

(Updates after Fed rate decision, adds closing prices)

By Noel John and Anjana Anil

July 29 (Reuters) - Gold erased earlier losses to rise 2% on

Wednesday, after the U.S. Federal Reserve held benchmark

interest rates steady, sending the dollar and Treasury yields

lower, while markets digested Chairman Kevin Warsh's remarks.

Spot gold was up 1.9% at $4,101.99 per ounce by 2:55

p.m. EDT (1855 GMT), after rising to its highest level since

July 23 at $4,116.26/oz earlier. U.S. gold futures for

August settled around 0.1% lower at $4,036.30.

The Fed held interest rates steady, a choice that may

intensify questions about how U.S. central bank chief Kevin

Warsh will deliver on his commitment to bring inflation back

down to the 2% target.

The U.S. dollar fell against the euro on Wednesday after the

rate decision, making bullion less expensive for overseas

buyers, while yields on the benchmark 10-year U.S. Treasury note

pared earlier gains.

"Precious metals are leading a modest asset rally even as

Chair Warsh sounds quite hawkish overall - it feels like a

relief rally after the Fed held rates steady. It's unclear how

long this will last. Warsh's diction is sophisticated and fairly

complex, so the market may change its mind upon deeper

reflection," said Tai Wong, an independent metals trader.

The Fed's Warsh said that the U.S. central bank has no

higher "soft target" for inflation and is determined to meet its

longstanding 2% goal despite leaving rates unchanged amid

elevated inflation readings.

"The long end of the bond market is panicking and dragging

stocks lower into the close. The fear of inflation is helping

gold outperform," Wong added, citing gold's traditional property

as a hedge against inflation.

Traders now see a 64% chance of a rate hike in September,

compared with around an 81% chance seen before the policy

statement, according to CME Group's FedWatch tool.

Investors await June U.S. Personal Consumption Expenditures

data, due on Thursday, for further cues on monetary policy.

Meanwhile, the Bank of England and the Bank of Japan are

also widely expected to keep rates unchanged this week, and to

caution against mounting inflationary pressure from the Middle

East war.

Spot silver climbed 3.2% to $58.96 per ounce,

platinum added 1.9% to $1,636.10, and palladium

firmed 1% to $1,281.75.