(Recasts, updates with closing prices, market activity, adds NEW YORK to dateline)

By Frank Tang and Atul Prakash

NEW YORK/LONDON, Dec 14 (Reuters) - Spot gold slipped to a one-week low on Friday, hurt by a dollar rally after a report showed signs of U.S. consumer inflation and slashed expectations of more aggressive interest rate cuts from the Federal Reserve.

Even though rising consumer and wholesale prices should boost gold's appeal as a hedge against inflation, bullion's near-term direction could hinge on the strength of the dollar, which has been rising this week on the outlook for a more resilient U.S. economy, market watchers said.

Spot gold XAU= fell as low as $787.60 an ounce, the lowest since Dec. 6, and was quoted at $792.70/793.50 by New York's last quote at 2:15 p.m. EST (1915 GMT), against $797.10/797.80 late in New York on Thursday when it tumbled around 2 percent.

Most-active February gold GCG8 on the COMEX division of the New York Mercantile Exchange settled down $6.00 at $798.00 an ounce.

The dollar surged 1.5 percent versus the euro, the highest since late October, after a government report showed that consumer prices jumped 0.8 percent, driven by surging energy costs. [ID:nN14305067]

The U.S. consumer price index in November rose at its fastest pace in more than two years, which may limit the Fed's willingness to cut rates and in turn preserve the return on dollar assets.

"I am impressed with how gold is acting in the face of the stronger dollar," said Greg Orrell, portfolio manager, OCM Gold Fund in Livermore, Calif.