* Nikkei posts weekly gain of 2 pct on weaker yen
* Fed's Dudley "quite pleased" markets increasing rate hike bets
* European markets look set for strong open
* G7 finance ministers meeting begins in Sendai, Japan
* Gold poised for biggest weekly drop in 8 weeks
By Lisa Twaronite and Nichola Saminather
TOKYO/SINGAPORE, May 20 (Reuters) - Asian shares edged up on Friday but were on track for a weekly loss, while the dollar was poised for a winning week on bets the U.S. Federal Reserve could raise rates as early as next month.
European markets are set for a strong start, with financial spreadbetters expecting Britain's FTSE 100 to open 1 percent higher, France's CAC 40 to start the day up 0.9 percent and Germany's DAX to trade 0.8 percent higher.
MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.7 percent, though still down 0.2 percent for the week and off 4.2 percent so far this year.
Japan's Nikkei stock index erased earlier losses to end the day up 0.5 percent, extending gains for the week to 2 percent as the yen recoiled against the resurgent dollar.
China's CSI 300 and the Shanghai Composite surrendered earlier gains amid fading optimism about the nation's economic growth prospects. Both indices were flat, on track for weekly losses of 0.4 percent and 0.7 percent, respectively. Hong Kong's Hang Seng added 1.1 percent, on track for a rise of 0.9 percent for the week.
Wall Street fell on Thursday with the Dow Jones industrial average and the S&P 500 both touching roughly two-month lows before paring losses.
New York Federal Reserve President William Dudley, a permanent voting member of the central bank's rate-setting committee, said there was a strong sense among Fed officials that markets were underestimating the probability of policy tightening and that the central bank was on track for a rate hike in June or July.
Dudley said he was "quite pleased" investors had apparently increased bets that a rate hike would come soon.
"The Fed has regained the upper hand here," strategists at Brown Brothers Harriman said. "Moreover, the response by the dollar and the interest rate markets suggest monetary policy still matters."
Dudley's comments came a day after minutes of the Fed's April meeting revealed that most policymakers felt a rate increase might be appropriate as early as June.
Markets are pricing in a 32 percent chance of a rate hike in June, according to the CME FedWatch tool, up from 15 percent on Tuesday. A majority now expect a rate hike at the July meeting.
"Despite the increasing certainty (of a rate move), risk appetite stayed on the side-lines. U.S. and European equities were sold," Bernard Aw, market strategist at IG in Singapore, wrote in a note. "Investors are worried that if there is a rate hike in June, the economy may not be able to support it."
The dollar index, which gauges the greenback against a basket of other major currencies, was steady at 95.297 after climbing as high as 95.502 overnight, its loftiest since March 29. The index is poised for a 0.7 percent weekly gain.
The dollar strengthened 0.2 percent against the yen to 110.110, up 1.3 percent for the week. It hit 110.39 overnight, its highest since April 28, before the sell-off in equities led some investors to seek the safe-haven Japanese currency.
The euro gained 0.1 percent to $1.12085, following a drop to a more than seven-week low of $1.1180 overnight. It was down 0.9 percent for the week.
Sterling advanced as strong retail sales data reduced chances of an interest rate cut by the Bank of England, and polls showed growing support for Britain to remain in the European Union.
The pound was holding steady at $1.4608 after touching a 3-1/2-week high of 1.4663 overnight.
Currencies are likely to be a topic at the G7 finance leaders' meeting in Japan on Friday and Saturday. The meeting could expose a rift on issues ranging from currency to fiscal policies within the group of advanced economies.
Continuing fears about supply outages in Canada and Nigeria bolstered crude oil even as the prospect of a U.S. rate hike prompted some investors to take profits after recent gains.
U.S. crude added 1 percent to $48.64 a barrel, up 5.3 percent for the week, while Brent crude advanced 0.7 percent to $49.17, up nearly 2.8 percent for the week.
The dollar's gains weighed on gold, setting the precious metal on track for its biggest weekly decline in eight weeks.
Spot gold was little changed at $1,253.90 after losing 2 percent over the previous two sessions, on track for a drop of 1.5 percent for the week.
(Reporting by Lisa Twaronite; Editing by Kim Coghill and Jacqueline Wong)