(Adds details, analyst comments, updates markets)
* Producer prices increase 0.4 percent in September
* Producer prices gain 2.6 percent year-on-year
* Core PPI rises 0.2 percent; up 2.1 percent year-on-year
* Weekly jobless claims drop 15,000
By Lucia Mutikani
WASHINGTON, Oct 12 (Reuters) - U.S. producer prices rose in September as the price of gasoline recorded its biggest gain in more than two years amid hurricane-related production disruptions at oil refineries in Texas.
Other data on Thursday showed applications for unemployment benefits dropped to a more than one-month low last week as the boost to claims in Texas and Florida from Hurricanes Harvey and Irma continued to unwind.
While the storms impacted the data, there were signs of underlying strength in both wholesale inflation and the labor market, potentially leaving the Federal Reserve on track to raise interest rates again in December.
"The strength of the inflation and labor market indicators reported today provide important support to our December interest rate hike call," said Scott Anderson, chief economist at Bank of the West in San Francisco.
The Labor Department said its producer price index for final demand rose 0.4 percent also lifted by an increase in the cost of services. Wholesale prices advanced 0.2 percent in August.
In the 12 months through September, the PPI jumped 2.6 percent. That was the biggest gain since February 2012 and followed a 2.4 percent increase in August.
Wholesale gasoline prices soared 10.9 percent in September after increasing 9.5 percent in August. The increase was the largest since May 2015 and accounted for two-thirds of the 0.7 percent rise in the price of goods.
The Labor Department said higher energy prices were likely the result of "reduced refining capacity in the Gulf Coast area due to Hurricane Harvey." Last month's hurricane-driven surge in gasoline prices, however, is likely to be temporary amid ample crude oil supplies.
The dollar rose marginally against a basket of currencies as investors awaited September's consumer inflation report on Friday. Prices of U.S. Treasuries rose slightly while stocks on Wall Street were little changed after results from JPMorgan and Citigroup failed to fuel the optimism that had driven indexes to record highs.
A key gauge of underlying producer price pressures that excludes food, energy and trade services rose 0.2 percent last month after a similar gain in August. The so-called core PPI increased 2.1 percent in the 12 months through September after climbing 1.9 percent in August.
Inflation has stayed relatively low, with the main measure tracked by the Fed retreating further below its 2 percent target in August. Data on Friday will likely show the core consumer price index increasing 0.2 percent in September and advancing 1.8 percent on an annual basis, according to a Reuters survey.
Price pressures remain benign despite the labor market nearing full employment, with the jobless rate at more than a 16-1/2-year low of 4.2 percent. Fed Chair Janet Yellen has said that temporary factors such as one-off price cuts by wireless telephone companies are holding back inflation.
Minutes of the Fed's Sept. 19-20 meeting published on Wednesday showed a vigorous debate among policymakers over inflation, with "several" expressing concern that "the persistence of low rates of inflation might imply that the underlying trend was running below 2 percent."
Despite tepid inflation, U.S. financial markets have largely priced in a rate increase for December. The Fed has increased borrowing costs twice this year.
In a second report on Thursday, the Labor Department said initial claims for state unemployment benefits decreased 15,000 to a seasonally adjusted 243,000 for the week ended Oct. 7, the lowest level since late August.
Claims have been declining since surging to an almost three-year high of 298,000 at the start of September as workers displaced by the hurricanes were left temporarily unemployed.
As a result of hurricanes Harvey and Irma, nonfarm payrolls dropped by 33,000 jobs last month, the first decrease in employment in seven years. A rebound in job growth is expected in October, boosted by the return of the dislocated workers as well as the start of rebuilding and clean-up efforts in storm-ravaged areas.
The labor market's underlying strength was underscored by a 32,000 decline in the number of people still receiving benefits after an initial week of aid to 1.89 million in the week ended Sept. 30. That was the lowest reading for the so-called continuing claims since December 1973.
The uninsured employment rate fell one tenth of a percentage point to a record low of 1.3 percent.
"The data suggest that payrolls will bounce back quickly after last month's hurricane-related weakness and that the underlying trend in employment growth remains strong, more than strong enough to keep the unemployment rate declining," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York. (Reporting by Lucia Mutikani; Editing by Paul Simao and Chizu Nomiyama)