* Gold set for best week since early-August
* U.S. manufacturing data for Dec. dips to decade lows
* Silver extends gains into fourth week
* Minutes of Fed's Dec. 10-11 policy meeting due at 2 p.m. EDT
By Karthika Suresh Namboothiri and K. Sathya Narayanan
Jan 3 (Reuters) - Gold prices surged on Friday to a four-month peak, racing past the key $1,550 an ounce level after a U.S. air strike in Iraq killed the commander of Iran's elite Quds Force, prompting a rush into safety assets.
Spot gold XAU= rose 1.3% to $1,548.94 per ounce as of 1:31 p.m. EST (1831 GMT), having risen to $1,553.20 earlier in the session, its highest since Sept. 5.
U.S. gold futures GCcv1 settled 1.5% higher at $1,552.40.
The overnight attack was a dramatic escalation in a "shadow war" in the Middle East between Iran and the United States and its allies, principally Israel and Saudi Arabia. Iran threatened to retaliate after the air strike. the U.S. air strikes overnight in Iraq from orders of President Trump and Iran's leader vowed revenge as a result, the equity markets are down and safe-havens are higher, causing a move higher in the precious metals," said David Meger, director of metals trading at High Ridge Futures. MKTS/GLOB
"The market has been trading well since we broke out above the $1,490 level, making new recent highs this morning up above $1,550."
U.S. 10-year yields fell sharply, while the Japanese yen hit a two-month high against the U.S. dollar. USD/ US/
Gold, like other safe-haven assets, benefits during times of political uncertainty. The metal was set for its best week since early-August, up more than 2.5%.
"We are seeing gold and silver continue to build on the gains we saw towards the end of December and there is no doubt that the latest developments with the attack in Iraq has taken us up to this level," Saxo Bank analyst Ole Hansen said.
U.S. manufacturing sector data, which contracted in December by the most in more than a decade, further supported gold. were also watching out for minutes of the Federal Reserve's Dec. 10-11 policy meeting, due out at 2 p.m. EST (1900 GMT).
On the trade front, The United States and China are to sign an interim deal on Jan. 15, but investors await details regarding the fine print of the agreement.
Elsewhere, palladium XPD= added 1.3% to $1,985.40 an ounce, after rising to $1,988.27 earlier in the session, not far from the all-time high of $1,998.43 notched in December.
Platinum XPT= gained 0.4% to $982.84 an ounce and was set for its biggest weekly gain since October. Silver XAG= was up 0.3% at $18.08, extending gains into a fourth straight week.