* Palladium hits highest since Feb. 27

* Speculators raise net shorts in COMEX Gold

* U.S. Fed's two-day policy meeting starts on Tuesday

(Adds Commerzbank comments, updates prices)

By Eric Onstad

LONDON, Sept 24 (Reuters) - Gold was steady on Monday partlyin response to a dip in the dollar, but activity was mutedbecause investors are waiting for a U.S. central bank meetingthis week, expected to result in an interest rate increase.

Spot gold XAU= was up 0.1 percent at $1,200.03 an ounce by1220 GMT, after declining as much as 1.3 percent on Friday.

U.S. gold futures GCcv1 were up 0.2 percent at $1,204 anounce. Liquidity was thin during Asian trading hours on Mondayas markets in Japan and China were closed for a holiday.

"Gold is lacking any strong driver at the moment," said OleHansen, head of commodity strategy at Saxo Bank in Copenhagen.

Investors are awaiting details from the two-day FederalReserve meeting concluding on Wednesday, when the U.S. centralbank is widely expected to raise benchmark interest rates andshed light on the path for future rate hikes.

"The question is what kind of wording is going to accompanythat hike. Based on that, gold is unlikely to make much of amove ahead of that meeting," Hansen said.

"The risk to the dollar is some additional weakness, but atthis stage we have to maintain a neutral stance. There isn'tmuch point chasing a market stuck in a $20 range."

Gold has fallen more than 12 percent since a peak in Aprilagainst a backdrop of trade disputes and as rising U.S. interestrates diminish demand for non-interest bearing bullion.

The dollar index .DXY also failed to show clear direction,with the currency strengthening in Asian trade on news thatChina had cancelled trade talks with the United States. But thedollar was down 0.2 percent in European trade.

The United States and China imposed fresh tariffs on eachother's goods on Monday as the world's biggest economies showedno signs of backing down from a trade dispute that is expectedto knock global economic growth. urn:newsml:reuters.com:*:nL4N1WA1OF

Meanwhile, speculators increased their net short position inCOMEX gold contracts in the week to Sept. 18, U.S. data showedon Friday. CFTC/

"The price would rise noticeably if sentiment were to turnand short positions were to be covered. This may happenfollowing the Fed rate hike expected on Wednesday, as gold hasoften gained following a Fed rate hike in the past," Commerzbanksaid in a note.

Among other precious metals, spot silver XAG= rose 0.3percent to $14.30 an ounce. Platinum XPT= added 0.3 percent to$829.30, after hitting its highest in six weeks at $838.40 onFriday.

Palladium XPD= gained 0.7 percent to $1,056.80 an ounceafter hitting a high of $1,060, the highest since Feb. 27.

(Additional reporting by Nallur Sethuraman in Bengaluru.Editing by Jane Merriman and Louise Heavens) ((eric.onstad@thomsonreuters.com; +44 20 7542 7093; Twitter https://twitter.com/reutersEricO ; Reuters Messaging: eric.onstad.thomsonreuters.com@reuters.net))