Oil fell on Wednesday as rising U.S. crude inventories and weak economic data raised doubts about a demand rebound in the world's top energy consumer.

U.S. crude inventories rose by 1.7 million barrels in the week to July 31, according to the U.S. Energy Information Administration, against forecasts for an 800,000-barrel build as refinery cut back on utilization rates.

The big build on crude caught some people by surprise and shows overall weakness in the economy and the unwinding of economic optimism, said Phil Flynn, analyst at PFGBest Research in Chicago.

Total U.S. product demand during the four weeks to July 31 fell by 3.1 percent against year-ago levels, while demand for distillates -- including key industrial fuels such as diesel -- fell by 7.9 percent.

U.S. light, sweet crude traded down 23 cents to $71.19 a barrel by 12:42 p.m. EDT. London Brent crude rose 36 cents to $74.64 a barrel.

Early pressure on prices came from weak economic data, with the Institute of Supply Management showing the U.S. service sector, which accounts for about 80 percent of U.S. economic activity, contracted in July at a faster pace than in June.

The number of U.S. jobs lost in the private sector fell in July but firms increased planned layoffs, according to the ADP Employer Services report, suggesting the labor market remained troubled even as the pace of losses slowed.

Energy markets have been looking to broader economic data for signs of an end to the recession and a potential rebound in oil demand. Optimism has helped lift crude from below $33 a barrel in December, well off record highs near $150 a barrel reached in July 2008.

Further support has come from a series of output reductions agreed by the Organization of the Petroleum Exporting Countries (OPEC) last year.

OPEC member Kuwait on Wednesday said the producer group would likely keep output targets unchanged when it next meets in September if prices stay at current levels.

The wide price swings in oil in recent years have spurred calls for greater market regulation.

The U.S. Commodity Futures Trading Commission, which oversees regulated futures exchanges, held its third and final hearing on Wednesday into whether it should limit how many futures contracts hedge funds, investment banks and other speculators can control to help limit big movements in energy prices.

Funds that invest heavily in the sector argued that they were not responsible for the wild volatility in energy prices, while CFTC Chairman Gary Gensler reiterated the commission should seriously consider setting position limits.

Investors were awaiting news from a meeting between trade representatives and Britain's financial powers, the UK Financial Services Authority (FSA) and the UK Treasury over market transparency and efficiency.

(Reporting by Matthew Robinson, Robert Gibbons, and Gene Ramos in New York; Joe Brock in London; Editing by Lisa Shumaker)