May 6 (Reuters) - Gold prices hit their highest in more than a week on Wednesday following reports that the U.S. and Iran may be nearing a peace deal, cooling fears of higher inflation and an extended period of elevated interest rates.

Spot gold was up 2.8% to $4,685.23 per ounce by 2:10 p.m. EDT (1810 GMT), after hitting its highest level since April 27 earlier in the session. U.S. gold futures settled 2.8% higher at $4,694.30.

The U.S. dollar index fell 0.4%, making dollar-priced metals more affordable for other currency holders. [USD/]

"The optimism about a final deal between the U.S. and Iran has caused at least some short-term relief in gold, with lower oil prices, moderated inflation concerns, and shifted biases with regards to Fed actions later in the year," said Peter Grant, vice president and senior metals strategist at Zaner Metals.

"I wouldn't say we're necessarily completely out of the woods. The market is going to continue to pivot on Middle East headlines." 

IRAN REVIEWS US PROPOSAL

Iran said it was reviewing a new U.S. proposal, after sources said Washington and Tehran were working towards a one-page memorandum to end the war in the Gulf, while leaving tricky issues such as Iran's nuclear programme for later.

Reports of the possible agreement caused global oil prices to fall. Brent crude futures dropped to around $100 a barrel. [O/R] 

Higher oil prices create inflation concerns and could prompt central banks to keep rates high to fight price pressures. Gold, despite being a hedge against inflation, tends to suffer in a high-rate environment, as it yields no interest.

Investors are turning their focus to the release on Friday of the monthly U.S. employment report, which will serve as a test of whether the U.S. economy remains resilient enough to keep the Federal Reserve's monetary policy on hold, or whether a softening labour market could revive the case for rate cuts.

The ADP National Employment Report showed U.S. private payrolls increased more than expected in April.

Among other metals, spot silver rose 6% to $77.16 per ounce, platinum gained 4.7% to $2,044.00 and palladium added 3.3% to $1,535.00.

(Reporting by Ashitha Shivaprasad in Bengaluru; Editing by Paul Simao, Barbara Lewis and Tasim Zahid)

By Ashitha Shivaprasad