Brent crude futures dipped on Thursday after five days of gains, hovering around $122 a barrel on concerns that strong prices could crimp demand, with the European Central Bank lifting rates to control inflation.

Brent crude shed 42 cents to $121.88 a barrel by 1500 GMT. It hit a 2-1/2-year high above $123 on Wednesday, driven by violence in the Middle East.

U.S. crude futures were 21 cents stronger to $109.05 a barrel after touching $109.15 on Wednesday, their highest level since September 2008.

In the U.S., new claims for unemployment benefits fell slightly more than expected, while across the Atlantic the ECB lifted interest rates in line with expectations to 1.25 percent as it intensifies the fight against inflation.

Analysts said the market focus had switched from supply disruptions related to the Middle East protests to demand erosion after the ECB move, and after the Chinese central bank also lifted rates earlier this week.

At current crude oil prices, the risk is turning more and more to the amount of potential demand destruction, Petromatrix's Olivier Jakob said.

Euro zone debt worries and inflation are high on the agenda after Portugal overnight asked for an EU bailout and on concerns that a rise in euro zone interest rates would push up the cost of debt for already highly indebted economies.

Oil prices slipped from recent 2-1/2 year highs even after rebels said Muammar Gadaffi forces damaged a pipeline connecting oilfields to the port town of Marsa el Hariga, with analysts noting supply disruptions are already priced in.

Products futures are high enough that too much more and it could trigger some demand destruction, especially for gasoline, with supplies pretty ample in the U.S. But the Middle East and Libya keep the uncertainty in the market, said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.

But choppy trading after we post new highs shows the crude rally may be gasping for breath a little bit.

VTB Capital analyst Andrey Kruychenkov said prices were unsustainable at current levels in the absence of other disruptions.

We can't possibly justify a further sustained boost to prices unless unrest erupts in an oil-producing country other than Libya with serious threats to crude supplies, VTB Capital analyst Andrey Kryuchenkov said.


Strong crude futures have pushed up prices at the pump globally, further exacerbating the inflationary pressure governments face from the rising cost of food and raw materials.

In Asia, China's central bank lifted interest rates this week for the fourth time since October as it ramps up the battle against inflation.

Current price levels should have a negative impact on demand, said Tetsu Emori, a Tokyo-based commodities fund manager at Astmax Investments.

The International Energy Agency said on Wednesday the current oil price is harming global economic growth and is a mounting concern for consuming nations.

Saudi Arabia and the United Arab Emirates have raised output to compensate for supply loss from Libya, but there has been no coordinated supply policy response from OPEC to rein in high prices.

The nature of this lack of response and general drift of recent policy statements suggests that producers are a long way from seeking actively to bridle in the upside for prices, leaving the door to $130 Brent swinging open, analysts at Barclays Capital led by Paul Horsnell said in a note.

On Wednesday, weekly U.S. government data showed gasoline demand at the world's top oil consumer fell 1.2 percent from year-ago levels as prices at the pump neared $3.70 a gallon.

Gasoline demand should pick up as the U.S. driving season begins, but high prices would temper growth in consumption.

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