Brent holds near $114 on caution ahead of ECB meeting

A slew of disappointing U.S. data drove down Brent by more than 1 percent in the previous session, while prices were further pressured as investors began to scale down expectations of radical action from ECB Chairman Mario Draghi to rein in the debt crisis in Europe at Thursday's meeting.

"The market is taking a reality check ahead of the ECB meeting; the expectation is that Draghi won't do anything drastic and what we'll probably get is a lot of jaw-boning," said Ben Le Brun, a market analyst at OptionsXpress in Sydney.

Brent crude had slipped 18 cents to $114 a barrel by 0651 GMT, after dropping to $113.91 earlier in the session.

U.S. crude futures slid 9 cents to $95.21 per barrel, staying below their 200-day moving average of $96.65.

Investors are now eyeing key U.S. jobs data scheduled for release on Friday for clues on the health of the world's biggest economy and top oil consumer.

The United States has been struggling to add jobs and another soft report would strengthen the case for more easing, or QE3, from the Federal Reserve when it next meets in mid-September.

"We also have the Fed meeting coming up, so there are a few event risks on the horizon and what we're seeing is some profit-taking ahead of that," Le Brun said.

ECONOMIC WORRIES

Worries about economic growth moved centre stage after data showed that U.S. manufacturing shrank at its sharpest clip in more than three years last month, while separate releases showed exports and hiring in the sector also slumped.

The next big test for the U.S. will be the August unemployment data on Friday. The median forecast in a Reuters poll is for a gain of 120,000 jobs, down from 163,000 in July.

The data is crucial as Fed Chairman Ben Bernanke in a speech at a Fed symposium last week said the weak job market and an 8.3 percent unemployment rate was a "grave concern".

Investors were also paring expectations from the ECB's Thursday meeting, after driving markets higher on hopes it will detail a bond-buying plan to help out its crisis-ridden members.

Germany's Constitutional Court will rule on September 12 whether the euro zone's permanent bailout fund is compatible with German law, and realization is sinking in that the ECB may not be able to do anything significant until then.

Hopes for ECB bond buying had been raised on Monday after Draghi said that short-term sovereign bond purchases would not breach European Union rules.

IRAN, RESERVES

Prices were supported by the ongoing dispute between Iran and Israel, especially after the leader of Lebanon's Iranian-backed militant group Hezbollah this week warned that Tehran could hit U.S. bases in the Middle East in response to any Israeli strike on its nuclear facilities.

Concerns that sanctions on Iran's crude shipments will hurt global supplies have however abated, as some of its biggest buyers are finding ways to continue buying crude from Tehran.

"The likelihood of a negotiated settlement on Iran's nuclear capabilities is looking increasingly unlikely," JPMorgan analysts said in a report.

Still, efforts by Japan and South Korea to resume imports from Iran by September, "reinforce our base view that the crude market looks increasingly well-supplied in 2H2012, but geopolitical risks remain."

The sanctions have also led to a debate on the release of strategic petroleum reserves to rein in prices and enhance their effectiveness. The head International Energy Agency (IEA) said on Tuesday that crude markets are well-supplied.

The markets will also be awaiting weekly U.S. oil inventory data due from the American Petroleum Institute (API) on Tuesday and from the Energy Information Agency (EIA) on Thursday, a day later than usual because of a U.S. holiday this week.

A survey of six analysts forecast that crude stocks would drop 5.3 million barrels on average for the week ended August 31.

(Editing by Himani Sarkar and Joseph Radford)