PRECIOUS-Gold falls over 2% on fading Middle East peace hopes

* US, Iran trade blows

* US May Consumer Price Index data due at 1230 GMT

* Gold falls to its lowest since March 23

* Traders see 68% chance of US rate hike in December (Rewrites for Europe morning session)

By Noel John

June 10 (Reuters) - Gold fell over 2% to a more than two-month low on Wednesday as fresh fighting in the Middle East dimmed hopes of a resolution to the U.S.-Israeli war with Iran, heightening concerns about inflation and interest rate hikes.

Spot gold was down 2.1% at $4,172.44 per ounce by 0849 GMT, its lowest level since March 23. U.S. gold futures for August delivery shed 2.1% to $4,195.60.

"Gold remains a victim of growing inflation risks despite geopolitical tensions fuelling risk aversion. Renewed U.S.-Iran hostilities have essentially sabotaged efforts to end the war," said Lukman Otunuga, senior research analyst at FXTM.

Iran's Revolutionary Guards said they had carried out missile and drone attacks on U.S. military bases in Jordan, Kuwait and Bahrain in retaliation for American strikes on Iranian targets around the Strait of Hormuz.

The clashes mark one of the biggest exchanges in hostilities since the two countries agreed to a ceasefire in April.

Bullion has fallen more than 20% since the U.S.-backed war with Iran began in late February. The conflict has led to a surge in oil prices, stoking fears of inflation and higher interest rates.

While gold is seen as a hedge against inflation, higher rates typically weigh on the non-yielding metal.

Traders are currently pricing in a 68% chance of a U.S. interest rate hike in December, according to the CME FedWatch tool.

Investors await May Consumer Price Index data later in the day and the Producer Price Index reading on Thursday, to gauge the Federal Reserve's monetary policy stance after a strong jobs report last week raised rate hike bets.

"The incoming CPI report may heavily influence expectations around what actions the Fed takes in second half of 2026. On the technical front, gold's decline below the 200-day SMA (Simple Moving Average) is a bearish signal that may trigger additional selling pressure, aided by fundamentals," Otunuga said.

Spot silver fell 2.1% to $63.99 per ounce, platinum dropped 3.1% to $1,673.97, and palladium fell 0.4% to $1,217. (Reporting by Noel John in Bengaluru; Editing by Ronojoy Mazumdar)