UPDATE 10-Oil falls on U.S. budget, fuel demand concerns

* Weak manufacturing data, rising US inventories weigh

* Market eyes Middle East unrest

(Adds API oil stock data, updates prices)

By Matthew Robinson

NEW YORK, Dec 4 (Reuters) - Oil prices fell on Tuesday, as

concerns about the U.S. budget crisis and global fuel demand

outweighed ongoing worries about instability in the Middle East.

Markets have been on edge for weeks about whether U.S.

lawmakers can make a budget deal by year end to avert the

"fiscal cliff" -- automatic spending cuts and tax hikes that

analysts say could stoke a recession.

Oil markets also have been weighed down by euro zone

troubles this year. Even if a U.S. budget deal is reached,

market players said oil prices would be dragged by the prospect

that oil demand would remain weak next year in many developed

economies.

"The reality is that we're going to get through the fiscal

cliff," said Richard Ilczyszyn, chief market strategist of

iitrader.com LLC in Chicago, noting that worries about the

impact of instability in the Middle East on oil supplies was on

the back burner for the moment.

"Demand is relatively still weak for oil."

Protests in Egypt, escalating violence in Syria and the

West's standoff with Iran over its disputed nuclear program have

stoked concerns about the supplies of oil from the region, which

supplies a third of the world's crude.

Gold prices also fell on Tuesday, while U.S. stock

markets were little changed.

Front-month Brent crude futures traded down $1.08 to

settle at $109.84 a barrel, settling below the 20-day moving

average of $109.89 a barrel for the first mid-November.

U.S. crude oil futures gave up 59 cents to settle at

$88.50 per barrel, bouncing off the 14-day moving average when

it hit the intraday low of $87.57 a barrel.

Data released late Tuesday by industry group the American

Petroleum Institute (API) showed that U.S. crude stocks fell by

2.2 million barrels last week, while gasoline stocks rose a

sharp 5.7 million barrels and distillate stocks were up 1.1

million barrels.

After the API data, U.S. crude futures fell slightly from

earlier settlement levels in electronic trading, dipping by 68

cents a barrel to $88.41, after settling nine cents higher.

Trading in U.S. crude was light, with volumes about 28

percent lower than the 30-day moving average. Brent volumes were

average.

Demand concerns increased after the Institute for Supply

Management (ISM) said on Monday its index of U.S. factory

activity fell to its lowest since July 2009.

"The set-back in the ISM erases for now the idea that the

U.S. economy is decoupling from the rest of the world," said

Olivier Jakob from Petromatrix consultancy.

Amid talk of weak product demand, inventory data for the

week to Nov. 30 had been expected to show an 800,000 barrel

increase in distillate stockpiles, while gasoline inventories

were seen up by 1.8 million barrels, according to an expanded

poll of analysts by Reuters. Crude stocks were seen down by

300,000 barrels.

The U.S. Energy Information Administration will release its

weekly report on Wednesday.

(Reporting by Matthew Robinson in New York; Shadia Nasralla in

London; Ramya Venugopal in Singapore; Editing by Sofina

Mirza-Reid and Alden Bentley)

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