UPDATE 9-Oil rises on U.S. budget deal hopes, demand optimism

* U.S. crude leads oil complex higher

* Gasoline posts biggest 2-day gain since early November

* Germany's Ifo data better than expected, supportive to oil

(Updates throughout)

NEW YORK, Dec 19 (Reuters) - Oil prices rose on Wednesday as

expectations a battle over the U.S. budget will be resolved

spurred optimism about crude demand in the world's top consumer.

Concerns about the risk of a U.S. recession if no deal is

reached to avoid the "fiscal cliff" in January, as well worry

about the euro zone crisis, have weighed on the outlook for

demand for much of the fourth quarter, countering bullish

concerns that Middle East unrest could reduce oil supplies.

Even as President Barack Obama threatened to veto a

Republican tax plan as talks to avert a budget crisis by the end

of the year turned sour despite recent progress, both sides

appeared confident a deal remained within reach.

"There was a risk-on tone when we started the day globally.

All markets were looking to go higher, and I think crude has fed

off that," said Addison Armstrong, director of market research,

Tradition Energy in Stamford, Connecticut.

"You have a lot of good upside momentum going."

World shares rose to a 17-month high, with U.S. crude

finding additional momentum after the release of data from the

U.S. Energy Information Administration showing fuel demand hit

the second highest level for the year last week, while crude and

heating oil inventories fell.

Brent February crude rose $1.52 to settle at $110.36

a barrel in the biggest one-day gain since Nov. 19. The

front-month contract pushed above the 50-day moving average Of

$109.79 and briefly topped the 200-day moving average of

$110.39, technical levels closely watched by traders.

U.S. crude led the gains in the oil complex, however, with

the U.S. January crude contract trading up $1.58, or 1.8

percent, to settle at $89.51 a barrel, marking the biggest gain

in the front-month contract since Nov. 29.

With the January contract set to expire at the end of the

session, the more actively traded February crude also

gained $1.58, settling at $89.98 a barrel, after trading as high

as $90.33.

U.S. RBOB gasoline rose nearly 2 percent, taking

gains for the front-month contract over the past two sessions to

over 3 percent and marking the biggest two-day gain since Nov.

9. Gasoline traders have been closely watching for the restart

of the 325,000 barrel per day (bpd) crude unit at Motiva

Enterprises' Port Arthur, Texas refinery.

Repairs at the unit, which was shuttered shortly after it

was launched earlier this year due to pipe problems, were

expected to be completed on Sunday after a leak triggered a fire

on Monday, according to sources familiar with operations.

Oil found further support from the improving outlook for the

euro zone economy after Germany's Ifo economic research

institute said its business climate index rose to 102.4, higher

than the forecast of 102.0.

"Germany didn't disappoint - the Ifo business sentiment

reading sent a strong signal highlighting again the dynamism of

the German economy and the potential to support the euro zone

recovery next year," said Gekko Markets trader Anita Paluch.

Adding to positive sentiment was data showing U.S.

homebuilding permits touched their highest level in nearly 4-1/2

years in November.

Simmering tension in the Middle East, which has underpinned

prices during the year, also helped push oil higher.

Iran has said it will not stop its higher-grade uranium

enrichment in response to external demands, signalling a tough

bargaining stance ahead of planned new talks with world powers.

Israel has threatened air strikes on Iran if its nuclear

work is not curbed through diplomacy or sanctions, keeping

concerns about potential oil supply disruption in focus and the

threat of a Middle East war damaging to the global economy.

(Reporting by Robert Gibbons and Matthew Robinson in New York,

Manash Goswami and Florence Tan in Singapore and Sudip

Kar-Gupta, Shadia Nasralla, David Sheppard and Simon Falush in

London; editing by Andrew Hay and Alden Bentley)

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