* Brent set to post 13 percent gain this year
* Iran threatens to block Strait of Hormuz oil lane to West
* API says U.S. crude stocks rise unexpectedly
* Coming Up: EIA weekly oil stocks; 1600 GMT (Recasts first paragraph, updates prices, adds details)
By Alex Lawler
LONDON, Dec 29 (Reuters) - Oil dropped below $107 a barrel on Thursday as a stronger dollar and a rise in U.S. jobless claims countered Iranian threats to shut a vital oil trade route.
The euro fell to its lowest since September 2010 versus the dollar on Thursday as yields at an auction of Italian debt remained at levels seen as unsustainable. A report on Wednesday from a U.S. oil industry group showing a surprise rise in U.S. crude stocks also weighed on prices.
Brent crude was down 68 cents at $106.88 a barrel by 1440 GMT after falling nearly $2 the day before. Wednesday’s decline snapped a string of six straight sessions of gains. U.S. crude fell 40 cents to $98.96.
“A big increase in U.S. crude oil stocks and the falling euro against the dollar are the main pressure points for the market at the moment,” said Ken Hasegawa, a derivatives manager with brokerage Newedge in Tokyo.
Gains in the dollar can pressure dollar-denominated commodities by making them more expensive to consumers using other currencies. Gold fell to its lowest in almost six months and copper retreated for a second day.
Brent slipped after a report showed U.S. claims for unemployment benefits rose more than expected last week. Still, the underlying trend continued to point to improving labor market conditions.
Trading volume was lower than normal due to the holiday season. Brent faces resistance at $109.40, the level of the 100-day moving average, and at $109.50, the intra-day highs of the two previous sessions.
Attention later in the session will focus on whether the U.S. government’s Energy Information Administration (EIA) confirms the large 9.6 million-barrel rise in U.S. crude stocks reported on Wednesday by the American Petroleum Institute.
The EIA report due at 1600 GMT was forecast to show crude stocks fell by 1.7 million barrels.
Brent is still on track to post a 13 percent gain in 2011, supported by the virtual shutdown of Libya’s oil exports for much of the year, after a nearly 22 percent rise in 2010.
With Libyan output and exports now recovering, investors’ concern over oil supplies has shifted to Iran, the world’s third-largest oil exporter in 2010, according to the EIA.
A senior Iranian Revolutionary Guards commander said on Thursday the United States was not in a position to tell Tehran “what to do in the Strait of Hormuz,” state television reported.
The U.S. Fifth Fleet had said on Wednesday it would not allow any disruption of traffic in the strait, following an Iranian threat to stop oil flow through the strait if sanctions were imposed on its crude exports over its nuclear ambitions.
“Worries over Iran are supportive,” said Christopher Bellew, an oil broker at Jefferies Bache. (Additional reporting by Randy Fabi in Singapore; editing by James Jukwey)