* Libya output rises to 580,000 bpd
* Fed says U.S. economic recovery remains incomplete
* U.S. crude stocks fall nearly 5 million barrels (Adds API data In third paragraph)
By Lorenzo Ligato
NEW YORK, July 15 (Reuters) - Oil prices dropped by as much as $2 on Tuesday, deepening their biggest slide this year as rising Libyan supplies and downbeat economic data sharpened concerns the global market was heading into a near-term glut.
World oil prices have rapidly erased a geopolitical risk premium that had been pushing prices up since April, and selling has accelerated in recent days as traders shift their focus from violence in Iraq and Libya to weak global fundamentals.
Heavy liquidation in the Brent market appeared to ease by midday with prices rebounding from session lows of under $105 a barrel. The rebound continued in after-hours trade following American Petroleum Institute data that showed U.S. crude oil stocks fell nearly 5 million barrels last week.[ID: nL2N0PQ22U]
Still, dealers remained on edge after prices tumbled by nearly 6 percent in just weeks, with fears over the militant uprising in Iraq quickly being set aside by big hedge funds who have hastily pared back record bullish long positions.
"Crude's move up in June was due to Iraq-related fears, and that has been unwound very sharply as the speculative crude position got very, very long and demand has disappointed, especially in the United States," said Anuraag Shah at Tusker Capital, a hedge fund in Marina Del Rey, California.
He expects Brent to break below $100 a barrel later this year.
Despite ongoing fighting between militias in Tripoli, Libya's oil output has risen to 588,000 barrels per day (bpd), an increase of around 25 percent since the weekend, the acting oil minister told Reuters.
Brent futures lost 96 cents to settle at $106.02 a barrel, recovering from a low of $104.39 a barrel earlier in the session, the weakest point since April 2. The selloff is expected to continued this week as investors liquidate ahead of Wednesday's futures contract expiry.
U.S. crude futures lost 95 cents to settle at $99.96 a barrel. It had slipped to a low of $99.01 a barrel earlier in the session, breaking the 200-day moving average of $99.92, a key technical indicator closely watched by traders.
The spread CL-LCO1=R between the two benchmarks closed at $6.06.
The breakdown in prices has been concentrated in prompt Brent futures, with the first-month contract falling to its biggest discount versus second-month LCOc1-LCOc2 in four years, a structure known as contango that typically signals a surplus of immediately available crude.
August/September ICE Brent LCOQ4-U4 has fallen from parity to more than $1.10 a barrel, a dramatic slump in a spread that rarely turned negative over the past few years.
Other risk markets also fell on Tuesday after comments from U.S. Federal Reserve Chair Janet Yellen, who defended the central bank's loose monetary policy in testimony to a Senate committee. U.S. stocks slid after she raised concerns about "substantially stretched valuations" in some sectors.
DATA FUELS DEMAND WORRY
Despite rising supplies from Libya, concerns mounted after militia clashes in Tripoli closed the country's main airport, prompting the United Nations to evacuate its staff.
Traders were also eyeing the situation in Iraq, where politicians named a moderate Sunni Islamist as speaker of parliament on Tuesday, a first step toward a power-sharing government that could put an end to the Islamist insurgency that drove oil prices to nine-month highs in June.
As global oil supply remains solid, the oil markets are coming under pressure from weaker-than-expected economic data from some of the world's largest economies.
In China, lower global refining activity and weaker buying have decreased demand for crude oil, London-based consultancy Energy Aspects said in a note. Investors are awaiting June economic growth figures, due on Wednesday, to understand whether the world's top net oil importer needs further stimulus support.
In Europe, German investor confidence dropped in July for a seventh straight month to its lowest level since December 2012, a leading survey showed. (Additional reporting by Rowena Caine and Ron Bousso in London and Keith Wallis in Singapore; Editing by Marguerita Choy, Tom Brown, Peter Galloway and Cynthia Osterman)