Oil edged above $68 a barrel on Wednesday, reversing part of the previous day's slide of 3 percent, after industry data showed a sharp fall in U.S. crude stocks, boosting hopes of a demand rebound in the world's top energy user.

The release of more closely watched U.S. Energy Information Administration (EIA) data later in the day could confirm the bullish report from the American Petroleum Institute (API), and further underpin market sentiment.

More economic data due later -- August unemployment figures and July factory orders, both which are expected to be positive -- could underscore the U.S. economy's gradual pace of recovery and offer more trading cues.

By 2 a.m. EDT, U.S. crude for October delivery was up 54 cents at $68.59 a barrel, after touching a two-week low of $68.01 in early trade, and falling nearly 3 percent to settle Tuesday at $68.05. London Brent crude rose 53 cents to $68.26 a barrel.

Sentiment has become a little bit less bullish in recent sessions, because the economic recovery has already been factored into oil prices, and I think the market has risen a little ahead of the fundamentals, said David Moore, commodity strategist with the Commonwealth Bank of Australia.

Oil's decline came as economic concerns sent investors scurrying into safer havens like the U.S. dollar, outweighing positive U.S. manufacturing and home sales data on Tuesday.

Wall Street fell for a third straight day as renewed worries about the balance sheets of U.S. banks spooked investors. <.N>

Japan's Nikkei average <.N225> sank 2.5 percent on Wednesday, with exporters hurt by a stronger yen and sentiment dented by uncertainty over the U.S. financial sector's health.

But the release of API data showing that U.S. crude stocks fell 3.2 million barrels in the week to August 28, larger than the forecast of a 600,000-barrel drawdown, helped oil recoup some losses. The EIA will release its own inventory report at 10 a.m. EDT.

At 8:15 a.m. EDT, Automatic Data Processing (ADP) will unveil the U.S. employment report for August, while the Commerce Department will release July factory orders. Both data are expected to set the trading tone for the market.

Economists polled by Reuters expect 250,000 job losses in August, down from 371,000 in July. Factory orders are expected to rise 2.2 percent in July, versus a 0.4 percent gain in June.

On the supply front, the Organization of the Petroleum Exporting Countries is likely to leave output targets unchanged when it next meets on September 9 in Vienna.

Adding to already high inventories, OPEC has reduced its compliance with agreed production curbs, a Reuters survey on Tuesday found.

OPEC supply in August rose for a fourth consecutive month as Saudi Arabia, Nigeria and Venezuela increased their production, taking overall output discipline to 68 percent of the target from a revised 70 percent in July.

(Editing by Ben Tan)