Oil hovered above $80 a barrel after a steep decline in U.S. crude inventories sent prices up 1 percent the previous day, as doubts about the pace of economic recovery in the world's largest fuel consumer tempered the rally.

U.S. crude for December fell 18 cents to $80.22 by 1615 GMT, after hitting a high of $81 a barrel the previous day after news that U.S. crude inventories fell by a larger-than-expected 4 million barrels.

London Brent crude fell 22 cents to $78.67 a barrel, after settling up 80 cents on Wednesday.

When the (U.S.) economy grows by 3.5 percent one might expect a reasonable pick up in demand for oil, but it just does not seem to be happening, said Tamas Varga at oil broker PVM in a research note, referring to third quarter U.S. GDP growth.

Oil markets have been looking to equities and wider macroeconomic data in recent months for signs the economic crisis is easing and energy demand may rebound.

These external factors have been largely responsible for this year's price rally which has seen prices nearly double since lows near $40 a barrel in January.

But rallying U.S. equity prices on Thursday had a limited impact on oil as the market instead focused on ballooning product stocks. <.N>

U.S. distillate stocks -- often taken as a more faithful snapshot of demand than crude oil -- fell 400,000 barrels compared to analyst expectations for a 1 million barrel decline. They remain near 26-year highs and analysts said this will cap price rises in the event of a cold winter.

The economy is still muddled. While the EIA data had crude supply lower, product supplies weren't very much lower even though refinery use fell 1.2 percentage points, said Gene McGillian, analyst at Tradition Energy.

The oil price initially bounced after U.S. jobless claims fell by a more than expected 20,000 to a 10-month low of 512,000 but the gains were short-lived.

Analysts said U.S. monthly jobs data on Friday will be more comprehensive and is likely to give prices a steer.

U.S. employers in October cut payrolls by the smallest amount in 14 months as the economy's resumption of growth boosted optimism, but the jobless rate rose to a fresh 26-year high, a Reuters survey predicts.

On the supply front, Ida strengthened into a Category 1 hurricane on Thursday as it approached the Caribbean coast of Nicaragua and veered closer to oil infrastructure in the U.S. Gulf of Mexico.

(Additional reporting by James Topham in Singapore and Robert Gibbons in New York; editing by James Jukwey)