Brent crude dropped back drastically and U.S. crude deepened losses near the close on Thursday as investors took a second look at data showing a surprise build in U.S. stockpiles and the sharp rise in the dollar encouraged traders to jettison riskier assets.

Traders also cited some technical weakness in U.S. crude, which failed to break through its Wednesday session high, causing players to sell more late in the session.

"The late extension of losses reflect a delayed reaction to the EIA data (and) the dollar's gradually rise and the euro's slump also put pressure on crude futures," said Dominick Chirichella, senior partner at Energy Management Institute in New York.

The late downturn erased Brent crude's session gains, which were fostered by fears of supply disruptions due to rising tensions between the West and Iran. U.S. crude had been weakened early on due to the bearish inventory data.

In London, ICE Brent crude for February delivery ended a two-day winning strike and settled at $112.74 a barrel, down 96 cents, or 0.84 percent, after extending the day's low to $112.42. Brent crude had gained 5.89 percent in the first two trading days of the year.

U.S. crude for February, which is less influenced than Brent by international developments and more by domestic crude supply, settled at $101.81, falling $1.41, or 1.37 percent, having dropped to a session low of $101.54 late. The loss stemmed two days of gains, during which it advanced 4.4 percent.

Brent's premium against U.S. crude widened to $10.93 at the close, from $10.48 on Wednesday. <CL-LCO1=R>

Brent's trading volume rose 34 percent against its 30-day average, according to Reuters data. U.S. crude volume was up 11.7 percent from its 30-day average.

U.S. government data showed that domestic crude stockpiles rose 2.2 million barrels in the week to Dec. 30, countering forecasts that refiners had cut stockpiles for year-end tax purposes.

IRAN SUPPLY RISK

After European Union leaders agreed to halt purchases of Iranian crude to pressure Tehran on its nuclear program, Iran faced the prospect of cutbacks in its oil sales to China and Japan that would further threaten its economy.

Iran had threatened to halt shipping through the Strait of Hormuz if faced with greater sanctions, supporting crude prices in recent weeks. The United States has said it would counter any attempts to block the waterway and Saudi Arabia has pledged to increase output in case of a sudden supply cut.

Nigerian trade unions threatened to call a national strike and shut down large parts of the country's oil industry from next week if the government failed to restore a scrapped fuel subsidy, supportive for oil prices.

News that lenders to Swiss oil refiner Petroplus had extended the freeze on its borrowing to all credit lines on top of $1 billion choked off last week also added support for Brent. {ID:nL6E8C5219]

The day's crop of economic data showed U.S. private employment rose more than expected in December and filings for unemployment benefits fell last week, but investors were cautious ahead of the nonfarm payrolls and unemployment report for December.

The report, due at 8:30 a.m. EST (1330 GMT) on Friday, was forecast in a Reuters poll to show that nonfarm payrolls rose 150,000 and the unemployment rate ticked up to 8.7 percent from 8.6 percent in November.

A weak euro zone outlook due to sovereign funding concerns pulled the euro down to its lowest level against the U.S. dollar. (Reporting by Gene Ramos, Robert Gibbons and Matthew Robinson in New York,; Claire Milhench in London and Florence Tan in Singapore; Editing by Marguerita Choy)