LONDON Jan 25 (Reuters) - Copper prices edged up on Thursday to a fresh three-week high and were on track for their biggest weekly gain in two months, helped by a cut in bank reserves in top metals consumer China to free up liquidity, and softer dollar.

Three-month copper on the London Metal Exchange gained 0.2% to $8,581 per metric ton by 1213 GMT after touching $8,599, the strongest since Jan. 2. It also hit a three-week high on Wednesday with largest daily trading volumes seen over four months.

The gains came after China's central bank announced on Wednesday a deep cut in the amount of cash banks hold as reserves, a move that will inject about $140 billion of cash into the banking system.

Metals prices are being supported by optimism about Chinese policy support after a seasonal lull, SP Angel analyst John Meyer said at a note.

"The surprise 50-basis-point reserve ratio cut in China has seen buyers step into an illiquid market on expectations of a revival in construction activity," he added.

The move also strengthened the Chinese yuan against a basket of currencies, boosting the purchasing power of consumers in the country to buy greenback-priced metals. The U.S. currency softened after reaching a six-week high. Copper prices are also being supported by recent mining disruptions, with several major banks and research groups revising their balance outlooks from surplus to deficit. LME aluminium went up 0.3% to $2,235 a ton, nickel dropped 0.1% to $16,630, while zinc rose 0.8% to $2,604 and tin advanced 0.7% to $26,680. Lead was flat to $2,163.

(Reporting by Julian Luk in London; Editing by Rashmi Aich, Sohini Goswami and David Evans)