* India discounts narrow to up to $2 vs $3 last week
* China gold premiums slip from near three-year peak
By Rajendra Jadhav and Swati Verma
MUMBAI/BANGALORE, Dec 23 (Reuters) - Gold demand in India remained subdued this week despite a sharp fall in prices to over 10-1/2 month lows as a severe cash crunch and holidays kept buyers away from the market, while premiums in China fell from near 3-year highs touched in the prior week.
Dealers in India, the world's No.2 consumer of the metal, were offering a discount of up to $2 an ounce this week over official domestic prices that include a 10 percent import tax. In the previous week, they were offering a discount of up to $3.
"People do not have cash to buy gold in rural areas, while urban consumers are in holiday mood. They are not interested in buying gold," said Mukesh Kothari, director at bullion dealer RiddiSiddhi Bullions in Mumbai.
Last month, Prime Minister Narendra Modi scrapped 500- and 1,000-rupee banknotes, or 86 percent of the value of cash in circulation, as part of a crackdown on corruption, tax evasion and militant financing.
The move hit wedding season demand, dealers said.
Indian jewellers rely on the wedding season for an uptick in demand during winter after the end of key festivals such as Diwali, but this year wedding demand has fallen sharply due to the cash crunch, jewellers said.
Local gold prices fell to 26,862 rupees per 10 gram on Thursday, the lowest since Feb. 2, 2016.
Spot gold, which hit a 10-1/2-month low of $1,122.35 last week under pressure from a stronger dollar after a hawkish rate hike forecast from the Federal Reserve, was on track for a seventh straight weekly decline.
"Many investors have lost interest in gold over the last few years since it gave negative returns. They also fear the government may bring new rules to limit gold holding," said a Mumbai-based dealer with a private bank.
The government had clarified earlier this month that "there is no limit on holding of gold jewellery or ornaments."
Gold premiums in top consumer China fell from their near three-year highs hit last week.
Premiums in China against the international benchmark came down to $28-$29, traders said.
They rose to over $40 an ounce in the week to Dec. 16, the highest since January 2014, according to Thomson Reuters data. Premiums rose on fears of limited supply of the metal, traders said.
"There is some buying, but not very strong. People in China or Hong Kong do not buy for Christmas, but only for the Chinese New Year and we have three more weeks to go for that," said Ronald Leung, chief dealer at Lee Cheong Gold Dealers in Hong Kong.
In Hong Kong and Singapore, sellers offered premiums of up to $1.50 an ounce. Discounts in Tokyo remained at 50 cents. (Additional reporting by Nallur Sethuraman in Bengaluru; Editing by Subhranshu Sahu)