Corrects paragraph 2 to say that spot gold had hit its lowest level since May 5 earlier in the session, and not that it was at the lowest level since May 5

By Anjana Anil

May 15 (Reuters) - Gold dropped more than 2% on Friday as surging Treasury yields and a stronger U.S. dollar dulled its appeal, with higher oil prices and persistent tensions in the Middle East reinforcing expectations of higher interest rates.

Spot gold XAU= was down 2.1% at $4,551.81 per ounce by 1141 GMT after hitting the lowest level since May 5 earlier in the session. Bullion is on track for a weekly loss, down 3.4% so far. U.S. gold futures GCcv1 for June delivery lost 2.8% to $4,556.40.

Benchmark 10-year U.S. Treasury yields US10YT=RR rose to a near one-year high, increasing the opportunity cost of holding non-yielding gold. The dollar also firmed, making greenback-priced bullion more expensive for overseas buyers. US/USD/

"Yields and the dollar are higher on heightened inflationary concerns, stemming in part from the Gulf hostilities and backed up by the April PPI and CPI numbers released this week," said StoneX analyst Rhona O'Connell.

Brent crude oil prices were up 7.8% this week, hovering above $109 a barrel, as the Strait of Hormuz remains largely shut. O/R

Higher fuel prices can feed into inflation as manufacturers pass on costs. This, in turn, forces central banks to keep interest rates elevated, dimming non-yielding gold's appeal.

Inflation data this week has shown consumers and businesses are starting to see big increases in price pressures as a result of the war.

Traders have largely priced out U.S. interest rate cuts this year, according to CME's FedWatch Tool. FEDWATCH

"Gold has been wary of the Gulf war for a good while now and the slew of news out of India this week with respect to import duties has exacerbated tensions in an already weak market," O'Connell added.

Gold discounts in India jumped to a record this week, triggered by a sharp import duty hike. GOL/AS

"Longer term, the mood is constructive towards higher prices, but arguably in the short term gold is unreadable as uncertainty grips the newswires," said independent analyst Ross Norman.

Spot silver XAG= fell 6.3% to $78.26 per ounce, platinum XPT= lost 3.1% to $1,991.33, and palladium XPD= was down 1% at $1,422.41. All three were headed for weekly losses.