July 28 (Reuters) - Gold rose more than 1% on Thursday as a contraction in the U.S. economy boosted its safe-haven allure and helped to extend gains driven by a less aggressive tone from the Federal Reserve chairman.

The U.S. economy unexpectedly contracted in the second quarter, with consumer spending growing at its slowest pace in two years and business spending declining, which could fan market fears that the economy was already in recession.

Spot gold extended gains on the data, and was last up 1.1% at $1,752.39 per ounce by 1:59 p.m. EDT (1759 GMT), helped along by a subsequent slide in U.S. Treasury yields.

U.S. gold futures settled 1.8% higher at $1,750.30.

After the GDP data confirmed recessionary fears, traders anticipate the Fed will be slower to introduce rate hikes, boosting the appetite for gold, Phillip Streible, chief market strategist at Blue Line Futures in Chicago, said.

Higher interest rates usually dull gold's appeal because they increase the opportunity cost of holding the asset which bears no interest.

After the Fed's meeting on Wednesday, when it raised overnight interest rate by three-quarters of a percentage point, Powell said another "unusually large" hike may be appropriate at its meeting in September, but the decision will be determined by incoming economic data until then.

Inflation's not going to end with this Fed hike, and given the downtrend in gold, it's now at an attractive level and presents an opportunity for investors looking to diversify their portfolio, said Michael Matousek, head trader at U.S. Global Investors.

Silver rose 4.3% to $19.94, while platinum fell 0.2% to $885.00.

Palladium rose 2.6% to $2,083.69.

Top palladium producer Nornickel (GMKN.MM) of Russia, kept its previous 2022 output forecast unchanged despite Western sanctions against Moscow over Ukraine.