(Updates for US mid-session trading)

* Gold hit highest since June 5 on Thursday

* Traders scale back Sept. rate hike bets to 31% - CME

FedWatch

* Oil prices on track for weekly gains

* Gold discounts in India widest in two months

By Sukanya Mitra

Aug 14 (Reuters) - Gold advanced on Friday and was headed

for a weekly gain, buoyed by a weaker dollar after in-line U.S.

inflation readings this week tipped the scales in favor of an

interest rate hold by the Federal Reserve next month.

Spot gold gained 1% to $4,391.49 per ounce by 12:00 p.m.

EDT (1600 GMT). Prices declined 1.3% in the previous session on

profit-taking after touching their highest level since June 5.

Bullion is up around 1.2% for the week so far.

U.S. gold futures rose 0.7% to $4,449.00.

"The lower U.S. dollar index is a friendly outside market that's

supporting gold today," said Jim Wyckoff, a market analyst at

American Gold Exchange.

The U.S. dollar index slipped 0.4%, making greenback-priced

bullion more affordable for buyers overseas.

Gold drew support from an unexpected decline in U.S. nonfarm

payrolls in July, and inflation readings this week that were

largely in line with expectations. This significantly lowered

expectations of an increase in interest rates next month, with

most analysts now seeing the central bank holding the current

3.50% to 3.75% range.

Markets are pricing in a 31% chance of a rate hike at the

September meeting, down from about 55% last week, according to

CME's FedWatch Tool.

"As we expect the Fed not to raise interest rates, gold

price therefore still has further upside potential," Commerzbank

said in a note.

Lower interest rates tend to support non-yielding gold.

Meanwhile, transit through the Strait of Hormuz appeared to

grind to a near-standstill after two more ships were attacked

and the United States said it could maintain a naval blockade of

Iran indefinitely.

Oil prices were on track for weekly gains on the news.

"If crude oil prices continue to rise, that's going to be a

bearish element for the metals market because it would aid

inflation and prompt central banks to raise interest rates,"

Wyckoff said.

Elsewhere, gold discounts in India widened to more than

two-month highs.

Spot silver climbed 0.9% to $65.01 per ounce, platinum

gained 1.6% to $1,744.45, and palladium rose 0.9%

to $1,319.00.