UPDATE 11-Oil extends sell-off, Brent hits 3-week low below $114
* Brent's two-day slide hits almost $4 a barrel
* U.S. oil demand down almost 2 pct in Jan-API
* Feb PMIs deal blow to euro zone recovery hopes
* U.S. crude stocks up, gasoline stocks lower-EIA (New throughout, adds closing prices, quotes)
By David Sheppard and Robert Gibbons
NEW YORK, Feb 21 (Reuters) - Brent crude oil fell to a three-week low below $114 a barrel on Thursday, dropping almost 2 percent as weak economic data added to concerns that the rally that began at the start of the year may be over done.
The slide took losses for the last two sessions to almost $4 a barrel and marked the biggest, two-day fall since October, as traders weighed the likelihood of higher supplies from Saudi Arabia and signs that higher prices may be hurting demand.
The possibility that the Federal Reserve might curb its economic stimulus measures earlier than previously expected has also pressured markets. U.S. crude has fallen by more than $4 in the last two days to below $93 a barrel, while U.S. equities posted a second day of sharp declines on Thursday.
"Short-term fundamentals simply do not justify sustained gains past $120," said Andrey Kryuchenkov, an analyst at VTB Capital in London.
"Brent was overbought amid overwhelming investor interest."
Brent crude for April delivery finished down $2.07 at $113.53 a barrel, after slipping to $113.32 during the session, Brent's lowest price since Jan. 29.
U.S. crude for April delivery fell $2.38 to settle at $92.84 a barrel. It dropped below its 50-day moving average, a key technical support level watched by traders that could now trigger further selling.
Brent had rallied by $10 a barrel in the first six weeks of 2013 on signs of strong demand from China and lower supplies from Saudi Arabia, eventually hitting a nine-month high above $119.17 on Feb. 8.
The move came as hedge funds and other large speculators roughly doubled their bets on rising oil prices in the past two months, the latest regulatory and exchange data shows, holding paper contracts equivalent to about 440 million barrels of oil.
That has left the market vulnerable to rapid corrections if funds choose to exit their positions, traders and analysts say.
During Wednesday's sell-off, U.S. crude prices lurched lower late-morning in New York as more than 2 million barrels worth of oil contracts changed hands in just two seconds, a Reuters analysis of exchange data showed.
That has left some traders nervous that big sellers are emerging in the market after reports that Saudi Arabia, the world's largest crude exporter, expects to raise output in the second quarter.
Oil prices took some support from increased tensions with Iran, after the U.N. nuclear watchdog said the Islamic Republic has begun installing advanced centrifuges at its main uranium enrichment plant.
The United States warned Iran it faces further pressure and isolation if it fails to address international concerns about its nuclear program in talks with world powers next week. Iran's oil exports have fallen sharply in the face of U.S. and European sanctions in the past year.
US OIL INVENTORIES, ECONOMIC DATA
The U.S. Energy Information Administration's weekly inventory report showed crude stockpiles rose by more than expected last week to stand at the highest level since last summer.
Gasoline prices took some support, however, after the EIA reported the biggest weekly decline in inventories of the fuel since May 2012 amid widespread refinery maintenance in the United States.
The American Petroleum Institute said U.S. oil demand had fallen by almost 2 percent in January from a year earlier.
"This isn't surprising given an economy that's still treading water," API chief economist John Felmy said.
Oil, equities and the euro were further pressured on Thursday as surveys showed that a downturn in the euro zone's businesses worsened unexpectedly in February.
Economists had expected that the euro zone purchasing managers' indexes (PMIs) would support tentative signs a recovery was under way, but instead they pointed to a first-quarter contraction of up to 0.3 percent.
Adding to the cautious outlook for the global economy, the U.S. Labor Department said on Thursday initial jobless claims increased and the Philadelphia Federal Reserve's business activity index fell in February for a second month. (Reporting by David Shepaprd and Robert Gibbons in New York, Alex Lawler in London and Florence Tan in Singapore; Editing by Bernadette Baum and Leslie Gevirtz)
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