* Supply risks rise with Libyan setback, OPEC talk
* Dollar index hits 4-yr high as Fed fuels rate hike fears
* Scottish 'yes' vote could weigh on prices (New throughout, updates prices and market activity)
By Catherine Ngai
NEW YORK, Sept 18 (Reuters) - Crude oil fell on Thursday, pressured by ample supply, concerns about demand growth and a stronger U.S. dollar.
Traders pinned much of the fall on the U.S. dollar's rally to its highest in more than four years against a basket of currencies. The dollar drew support from a fall in U.S. jobless claims and Federal Reserve interest rate forecasts that were higher than those predicted in June.
The decline in the global benchmark Brent price was limited by a drop in Libya's output and talk of OPEC production cuts. Brent hit a 26-month low on Monday after data showing a slowdown in China's factory output raised demand concerns.
A stronger dollar makes dollar-priced commodities such as oil more expensive for buyers using other currencies.
"I think currencies are the focus," said Richard Ilczyszyn, chief market strategist and founder of iitrader.com LLC in Chicago. "The bottom line is that with the stronger dollar and dollar index basket rally... you can just take 10 percent off the top of commodity prices across the board. With all the geopolitical risk escalating overseas, oil should be popping. But (the falls are) all currency as far as I'm concerned."
Brent fell $1.27 to settle at $97.70 a barrel. Prices have declined around 15 percent from a nine-month peak of $115.71 reached in June.
A setback in Libya's output, which has fallen by about 200,000 barrels per day, has put threats to supply higher on investors' list of concerns.
Still, market fundamentals remain weak due to fears of an economic slowdown coupled with plentiful oil flows, according to Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.
"We continue to have more than ample supply in U.S. production of crude and in the Atlantic basin. That's why the market has dropped as sharply. The realization that there's a considerable slowdown in demand will continue to fuel more selling pressure."
U.S. crude fell $1.35 to settle at $93.07 a barrel a day after dropping on government data that showed U.S. crude inventories rose 3.7 million barrels last week.
"To me, the market is playing off a little more of yesterday's bearish inventories. There's no shortage of oil anywhere," said Sal Umek, an analyst at Energy Management Institute in New York. "People are starting to square books off and roll over into the next month. We're in the final dribs and drabs of short-covering."
Investors were also wary of Thursday's referendum on independence in Scotland, home to most of Britain's North Sea oil reserves. Analysts say the result could affect oil prices. (Reporting by Catherine Ngai, Alex Lawler and Jane Xie; Editing by Clara Ferreira Marques, Dale Hudson and Peter Galloway and David Gregorio)