(REUTERS) - Oil prices held steady on Tuesday as better-than-expected German economic data and a successful Italian bond auction eased fears about European demand, while worries about supply disruption due to Middle East tensions continued to underpin the market.

Brent crude futures rose 11 cents to $118.04 a barrel at 1137 GMT. U.S. crude was up 47 cents to $101.38 a barrel.

Analysts and traders said good newsflow out of Europe had helped the euro rally against the dollar and lifted risk assets as investor sentiment about European demand growth had improved.

We had some successful bond auctions out of Italy, and the German data was better than expected, said Michael Hewson, an analyst at CMC Markets. That has taken the sting out of the Moody's downgrades.

The German ZEW survey, which measures analyst and investor sentiment, surprised on the upside, bolstering hopes Europe's largest economy was holding up despite the debt crisis.

Both oil contracts had been somewhat weaker earlier in the session after Moody's warned it might cut the top ratings of France, Britain and Austria by assigning their triple A debt ratings a negative outlook.

It also downgraded Italy, Spain and Portugal, citing uncertainty over the prospects for fiscal and economic reform in the euro area and the weak economic outlook in Europe.

Hewson said ratings agencies had lost the capacity to shock. If we had had these downgrades three years ago we would have seen a significant sell off ... but all we saw was a bit of profit-taking, he said.

It shouldn't come as a surprise to anyone that European countries face some difficult challenges, added Michael Poulsen, oil analyst at Global Risk Management. We saw the S&P downgrade about a month ago on almost the same countries.

Olivier Jakob, oil analyst at Petromatrix in Switzerland, added that Brent had lost some of the support it had enjoyed from the refined products complex after the extremely cold weather conditions of the last two weeks eased.

The cold blast in Europe is over. Yesterday we had some pressure on the gasoil crack, gasoil has not been able to move above $1,000 a tonne, and that has put a lid on Brent, he said.

MIDDLE EAST VIOLENCE

Oil prices remain underpinned by ongoing tension in the Middle East, with Israel accusing Iran and its Lebanese ally Hezbollah of being behind two bomb attacks that targeted Israeli embassy staff in India and Georgia on Monday.

Iran and Israel are already at loggerheads over Tehran's nuclear program.

Violence also spread in Syria as troops bombarded opposition strongholds, entering a 10th day of shelling and sniper fire in the city.

Meanwhile oil production and exports from Yemen's Masila oilfield, the country's largest, have stopped after workers from state-owned PetroMasila went on strike last Thursday.

Worries remain on the supply of crude in the Middle East, which should be built into Brent, said Tony Nunan, a risk manager with Mitsubishi Corp in Tokyo. The worsening of the situation in Iran or Syria could cause a shift in Brent prices.

The American Petroleum Institute will release its weekly report on U.S. crude stocks on Tuesday at 2130 GMT.

A Reuters poll of analysts is forecasting a rise in U.S. crude oil inventories for a fourth week in a row due to higher imports and lower refinery utilization.

On average, domestic crude stockpiles are expected to add 1.9 million barrels in the week to February 10, with six out of seven analysts predicting a build.