Brent steady above $107, heads for weekly fall as Europe weighs

Worries about the euro zone, already roiled by a Greek political chaos, mounted as Spain slipped into a recession, while sluggish data out of the United States sent worrisome signs about a still-fragile recovery at the world's largest economy and top oil consumer.

Brent crude edged up 7 cents to $107.56 a barrel by 11:34 p.m. EDT after slipping to as low as $106.62. Front-month Brent is on track to post its largest three-week fall since May 2011 after settling at the lowest level in 2012 on Thursday.

U.S. crude inched up 3 cents to $92.59, but is still headed for its largest three-week fall since August 2011.

We've got a bit of a perfect storm at the moment, Michael McCarthy, a markets strategist at CMC Global Markets in Sydney said, pointing to the worsening euro zone crisis, lower demand as industrial output slows and bloated crude inventories in the United States.

Debt crisis in the euro zone worsened as Spain's borrowing costs shot up while its troubled banks suffered a credit ratings cut. This added to worries of Greece's possible exit from the common currency group as it does not have a government to implement austerity measures in exchange for rescue funds.

Greece's exit has the potential for a structural destruction to Europe, McCarthy said. We have no idea how this will pan out.

He added that it was way too optimistic to expect a quick recovery in Europe as further credit downgrades will weigh on demand projections.

Asian shares tumbled on Friday and were set for their worst weekly showing since September while the euro hit a fourth-month low on euro zone worries. The dollar index .DXY rose 0.27 percent.

New claims for U.S. jobless benefits last week held at levels suggesting sluggish growth in hiring and factory activity in the mid-Atlantic region contracted in May.

SEAWAY REVERSAL

U.S. crude prices were supported by expectations that the Seaway pipeline reversal would ease the oil glut at Cushing, Oklahoma, its delivery point.

The first crude oil was expected to flow on the reversed Seaway pipeline this weekend, a historic move to ease a Midwest oil glut and bring depressed North American crude prices closer to world market levels.

July Brent's premium to West Texas Intermediate (WTI) narrowed to $14.60. The premium had ended at $18.90 on Wednesday, when the Brent June contract expired.

U.S. crude may bounce towards $96 next week as it has technically hit the bottom, McCarthy said, although a weaker demand outlook may push it down to $88 in the next month.

Investors are now eyeing a summit this weekend of G8 leaders and nuclear talks between world powers and OPEC-member Iran next week. Brent surged to above $128 a barrel in March on supply concerns amid tightening Western sanctions on Iran over its disputed nuclear program.

The United States delayed a bill for new economic sanctions on Iran's oil sector after Senate Republicans blocked the legislation on Thursday saying they needed more time to study the bill. The surprise move drew anger from Democrats who wanted approval ahead of nuclear talks next week.

Leaders at this weekend's G8 summit will discuss pressures on global oil markets and options they could take in response, a top White House official said on Thursday, declining to specify whether a release of strategic reserves would be on the table.

(Corrects dollar index rise to 0.27 percent, not 27 percent)

(Editing by Himani Sarkar)