* China's March factory activity shrinks - HSBC Flash PMI
* France, German PMI falls sharply
* Iran watched, South Africa stops oil imports
* U.S. weekly jobless claims drop to 4-year low
By Gene Ramos
NEW YORK, March 22 (Reuters) - Oil fell 1 percent in light activity on Thursday, dragged down by manufacturing data from China and the euro zone showing a drop in new orders that spurred fresh concerns about global fuel demand.
Factory activity in China, one of the biggest engines of global oil demand growth, shrank in March for a fifth straight month, with the rate of contraction accelerating and new orders sinking to a four-month low.
The report put oil markets, which have been balancing concerns about global demand against the potential loss of Iranian crude supplies, on a bearish trajectory in Asian trading. Prices dropped further after data showed a sharp fall in French and German factory activity that even the most pessimistic economists, eyeing the euro zone's debt woes, failed to predict.
"There's a bit of a China backlash at the moment, and we should expect more turbulence as people assess whether China is heading for a hard or a soft landing," said Filip Petersson, commodity strategist at SEB in Stockholm.
"There's a far greater chance of a soft landing, but there will be more doubts from time to time, and sentiment has turned quite rapidly bearish today in Europe."
Oil briefly pared losses after U.S. government data showed jobless benefit claims continued trending lower, falling last week to a four-year low.
International benchmark Brent crude closed at $123.14 a barrel, dropping $1.06, marking the lowest settlement for front-month Brent since March 6. U.S. May crude settled down $1.92 at $105.35 a barrel. Trading volumes for both Brent and U.S. crude were about 20 percent below the 30-day moving average.
At the start of the month, Brent crude prices hit an intraday high of $128.40, the highest since July 2008, while U.S. crude hit $110.55, highest since last May, supported by fears of supply disruption from Iran as the West tightens sanctions to stop Tehran's disputed nuclear program.
Top oil exporter Saudi Arabia earlier this week again pledged to increase output to meet any disruption in supplies as part of an effort to bring down oil and fuel prices, which have become a central issue in the U.S. presidential race.
Worries about rising U.S. gasoline prices have spurred pledges from the White House to ease supply bottlenecks in the world's biggest consumer, as well as considerations of tapping emergency reserves.
While France and Germany ruled out a coordinated release by members of the International Energy Agency such as the deal reached last summer when the Libyan civil war cut supplies from that OPEC member, the U.S. and Britain have discussed releasing their reserves.
South Korea on Thursday said it would also support a drawdown of its stockpiles to bring down prices.
In Cushing, Oklahoma, the delivery point for U.S. traded crude oil futures, U.S. President Obama reiterated his pledge to speed up the approval for the southern leg of the Keystone XL pipeline that would ship crude from the Midwest, where supplies are rising, to the Texas Gulf Coast refining hub.
The growing glut of stockpiles at Cushing have strengthened Brent's premium against U.S. crude futures. The spread widened to around $17.70, after closing at $16.93 on Wednesday.
Analysts polled by Reuters hiked their forecast for Brent oil prices this year by $4 to $114.30 a barrel, citing the concerns that supply losses could grow as a European Union ban on Iranian crude takes effect on July 1 and Asian countries face pressure from Washington to cut purchases from Iran.
South Africa has suspended almost all oil imports from Iran and intends to abide by a U.S. request to significantly reduce supplies coming from the Islamic Republic, a senior diplomat said on Thursday.
South Korea, another major buyer, has cut imports of Iranian crude in the first two months of 2012, adding to a growing group of Iran's clients bowing to international pressure on Tehran.
In addition to the risk of an Iranian disruption, adverse weather, technical glitches and unrest in Syria, Yemen and Sudan has taken about 1.1 million barrels per day of oil production offline, according to a Reuters report.