Aug 29 (Reuters) - Gold prices gained 1% on Thursday, fuelled by strong expectations of a Federal Reserve rate cut in September with investors focusing on U.S. inflation data for further insights on the potential size of the cut.

Spot gold rose 1% to $2,525.97 per ounce by 12:57 p.m. ET (1657 GMT). U.S. gold futures rose 0.9% to $2,559.60.

"The market seems to be pencilling in a rate cut no matter what, and now it is simply a question of what size – how big of a rate cut does the Fed do," said Everett Millman, chief market analyst with Gainesville Coins.

"My expectation right now is that at least until we get to the next Fed meeting, the gold market will probably chop sideways, but there does seem to be that strong floor of support because of geopolitics."

The Israeli military said its troops killed five Palestinian militants who were hiding inside a mosque in the West Bank city of Tulkarm.

Gold, which yields no interest of its own, is used as a safe investment during times of economic and geopolitical uncertainties.

Data earlier showed U.S. initial jobless claims slipped last week, with the Labor Department adding that the unemployment rate probably remained high in August.

Fed Chair Jerome Powell last Friday signalled interest rate cuts were imminent in a nod to concerns over the jobs market.

Traders see a 65.5% chance of a 25-basis-point (bp) rate cut in September and about a 34.5% probability of a bigger 50-bp reduction

Investors are now looking at Personal Consumption Expenditures (PCE) price index, the Fed's preferred measure of inflation, on Friday.

If the inflation report is positive, it is another argument in favour of cutting rates in September and will push gold prices upwards, said Julia Khandoshko, CEO at European broker Mind Money.

Elsewhere, spot silver firmed 1.4% to $29.50. Platinum gained 1.6% to $944.70 and palladium was up 3.6% to $980.65.