(Corrects milestone in 9th paragraph; sharpest weekly drop for US crude since June 2012, not September 2012)
* Libya hopes to restart El Sharara output pressures crude prices
* Brent crude oil set for biggest weekly fall in six months
* U.S. crude loses over $1
* U.S. weekly crude stocks down 7 million barrels vs forecast of 3 million -EIA
By Anna Louie Sussman
NEW YORK, Jan 3 (Reuters) - U.S. crude lost over $1 on Friday as data showing a larger-than-expected build in distillates dragged the oil complex lower.
Both U.S. and Brent crude fell for the fourth straight session, with Brent dropping on traders' anticipation of the return of Libyan oil supply.
Distillate stocks in the U.S. rose 5 million barrels to their highest level in just over two months as demand for the fuel took a hit while production approached record highs, weekly U.S. Energy Information Administration data showed on Friday.
Crude oil inventories in the United States fell for the fifth straight week, shedding seven million barrels in the week ended Dec. 27, more than double analysts' expectations for a three million barrel drop.
Analysts attributed the drop to a tax incentive that encourages oil companies to draw down inventory at year-end, and traders focused on the builds.
"The distillate number was very bearish," said Joseph Posillico, senior vice president at Jefferies Bache in New York.
"There was a big build in gasoline in the [East Coast] delivery point PADD 1. The U.S. refined products markets were weak so that's putting more pressure on U.S. crude."
Brent fell 89 cents to $106.89. The losses followed Thursday's 2.7 percent fall and capped a week in which the European benchmark dropped 4.7 percent, its biggest weekly percentage loss in six months.
U.S. crude fell $1.48 to settle at $93.96. It posted a weekly fall of more than 6 percent, its sharpest drop since June 2012.
New York RBOB gasoline futures and heating oil futures both lost over 1 percent on Friday.
Libya hopes to resume production at one of its largest oilfields, El Sharara in the west of the country, within three days after protesters agreed to suspend their two-month stoppage, officials said on Thursday.
An increase in oil exports from the OPEC member, which have dropped to less than 250,000 barrels per day (bpd) from 1.4 million bpd in July, would boost supply and weigh on prices.
The prospect of an increase in Libyan oil exports is more likely than previous false starts because it was coming from the west of the country, said oil analyst Olivier Jakob of Petromatrix in Zug, Switzerland.
"What has really failed to materialize so far has been a restart in the east, where you have autonomy groups that are controlling the ports," he said.
"In the west, it's a different situation because it was a protest at the field, but the port is actually open. If they restart production it can really move to the market." (Additional reporting by Joshua Franklin in London, Florence Tan in Singapore; Editing by William Hardy, Diane Craft and Meredith Mazzilli)