Gold was set for its largest one-day rise in a week, aided by a weaker dollar and Chinese inflation data that soothed some concern over the prospect of rapid rate rises in the world's second-largest bullion consumer.

Rising inflation particularly in emerging markets could encourage demand for gold, which can help investors insulate their portfolios against growing price pressures.

Spot gold rose 0.8 percent to $1,372.10 an ounce by 1213 GMT. The price has risen by about 5 percent since hitting three-month lows in late January. U.S. gold futures were up 0.6 percent at $1,373.60 an ounce.

What we're likely to see this year in terms of investment drivers for gold being the degree of rotation in Europe and the U.S. and the more developed markets that use ETFs as a physical vehicle ... being offset by sustained physical investment in Asia and concern over inflation is mounting, said RBS analyst Daniel Major.

There is going to be that driver for sustained coin and bar investment in 2011 that is likely to support the market.

ETF Securities, a provider of exchange-traded funds backed by physical metal, and asset manager BlackRock (BLK.N) estimate investors pulled just over $2 billion from commodity exchange-traded products in January.

Chinese inflation was lower than expected at 4.9 percent in the year to January, but price pressures continued to build and will force the central bank to stick to its course of monetary tightening. The number was in line with market talk in the past few days of a weaker number.

EURO CONCERN PERSISTS

Middle Eastern and Asian buying helped the euro recover from three-week lows against the dollar, but it was undermined by skepticism over the ability of European leaders to offer a quick and effective solution to the euro zone's debt problems.

A stronger dollar usually erodes demand for gold, yet that traditional inverse link has broken down in the last month, pushing the correlation between the two to its most positive in nearly six months.

Investors continued to watch developments of widespread unrest in Middle Eastern and north African nations. Political turmoil may drive investors to seek safe-haven assets such as gold.

Although investor demand in Asia is expected to remain firm this year, trading in the physical market was light this week, following the Lunar New Year holidays. Over the long (Lunar New Year) holiday, inventories have built up from the shipments that arrived, said a Hong Kong-based dealer.

He added that the gold premium in Hong Kong had narrowed to below $2 an ounce over London prices, from over $3 before the holiday when supply was tight and buying interest running high.

People have no intention to buy now, but I think next week activities will pick up.

The slower pace of inflation in China triggered some demand for industrial commodities, helping to push up the prices of platinum and palladium.

The international PGM market has come to expect a lot from China. Without Chinese purchases, both platinum and palladium would be trading at considerably lower levels, said UBS precious metals strategist Edel Tully.

Over the coming months platinum has the potential to appreciate faster than palladium if China's passenger car sales soften on a monthly basis as we expect, while the investor market for platinum grows.

Platinum was last up 0.5 percent at $1,835.24 an ounce, while palladium was up 0.2 percent at $833.50, nearing a fresh 11-year high.

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