(Updates prices, adds comment)
* Gold set for worst week since mid August
* Dollar index holds near multi-month highs
* Silver on course for biggest drop since February
Nov 9 (Reuters) - Gold fell over 1 percent to a one-month low on Friday as the U.S. dollar strengthened after the Federal Reserve reaffirmed its monetary tightening stance, seen as a negative for non-yielding bullion.
The Fed held interest rates steady on Thursday but is widely expected to raise them in December, for a fourth time this year, as it pointed to a healthy economy marred only by a dip in the growth of business investment. gold XAU= was down 1.3 percent at $1,207.78 per ounce at 13:30 a.m. EST (1830 GMT), having touched its lowest since Oct. 11 at $1,206.13. It was on track to end the week 2 percent lower, the steepest weekly decline since the week of Aug. 17.
U.S. gold futures GCcv1 settled down $16.5, or 1.35 percent, at $1,208.60.
"The Fed's announcement caused the dollar to strengthen and the outlook for higher U.S. interest rates has gold on the defense," said Bob Haberkorn, senior market strategist at RJO Futures.
Higher interest rates would be bullish for the dollar because non-U.S. investors would rather convert their local currencies to the greenback than buy gold, he said.
The dollar index .DXY of the greenback against six major currencies climbed, setting its sights on a 16-month high hit on Oct. 31. USD/
The outlook for tighter credit was supported by an unexpectedly big rise in U.S. producer prices in October, at the fastest pace in six years. number is a huge surprise and if this trend continues, it should give the Fed ammunition for future rate hikes," Walter Pehowich, executive vice president of investment services at Dillon Gage Metals, said in a note.
Also weighing on overall commodity market sentiment was a decline in oil prices, with benchmark Brent crude LCOc1 falling to its lowest since early April. O/R
"Gold is re-establishing its relationship with the crude oil market," said Miguel Perez-Santalla, vice president of Heraeus Metal Management in New York.
Gold can be used as a hedge against inflation fueled by higher oil prices.
Investor sentiment in gold was reflected in holdings of SPDR Gold GLD , the biggest gold exchange traded fund, which had an outflow of nearly four tonnes this week. GOL/ETF
Silver XAG= fell about 1.7 percent to $14.16 per ounce, after touching its lowest since Sept. 18. The metal was headed for its worst week since February.
Platinum XPT= shed 1.3 percent to $853.30 an ounce, while palladium XPD= fell nearly 0.7 percent to $1,116.