* API data shows 12 million barrel crude drop
* Eyes on bigger U.S. budget battles
* Upbeat China data lifts demand outlook, limits losses
* Coming up: US EIA inventory data on Friday (Updates with API data)
By Matthew Robinson and Robert Gibbons
NEW YORK, Jan 3 Oil slipped on Thursday, after prices hit 11-week highs, on worries about looming U.S. budget battles and signs of growing concern by the U.S. Federal Reserve about buying bonds to spur economic growth.
Focus shifted from the "fiscal-cliff" deal reached earlier this week to the upcoming wrangling U.S. President Barack Obama and Republicans in Congress will face over the budget, which could further stress the world's biggest economy.
The oil markets have been closely watching the U.S. budget crisis, as well as ongoing problems in the euro zone, for signs of further dampening in fuel demand.
Brent crude jumped over $112 a barrel for the first time since mid-October on Wednesday after the budget deal was reached, but players said the market was awaiting strong signs that the economy was improving to extend the rally longer term.
"The uncertainty because of the budget cuts and the ceiling debate s eems to have tempered the m arkets' e nthusiasm that things were getting better and that's why things have stalled," said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.
"I think we probably have more to go on the rally but a significant rally from here has to come from signs the economy is really improving," he added.
Prices fell further in a wider sell off of risk assets, including equities, in U.S. afternoon trade after the Federal Open Market Committee's December minutes showed rising concern about the risks of the Fed's policy of buying bonds to stimulate growth.
Brent crude settled 33 cents lower at $112.14 a barrel after rising more than 1 percent on Wednesday to settle at their highest level since October. U.S. crude fell 20 cents to settle at $92.92 a barrel, erasing smaller gains from earlier in the day after the Fed minutes were released.
Brent's premium to U.S. crude narrowed, in part due to news a major expansion of the Seaway pipeline -- aimed at easing the bottleneck at the Cushing, Oklahoma oil hub which has depressed U.S. prices -- should be at full rates by the end of next week.
The spread between Brent and West Texas Intermediate CL-LCO1=R narrowed to just over $19 a barrel on Thursday, down from 2012 highs of about $26.
Brent trading volumes were healthy, about 17 percent above the 30-day moving average, while U.S. crude trade was about average for that period.
EYES ON ECONOMIC, INVENTORY DATA
Data from the American Petroleum Institute, released on Thursday after the settlement, showed crude oil inventories tumbled by 12 million barrels last week, led by declines in the Gulf Coast, where refiners typically draw down stocks for end of the year accounting purposes.
Imports of crude oil fell by 845,000 barrels per day (bpd) to 7.43 million bpd in the week to Dec. 28, API data showed.
"This Gulf Coast draw could be to do with holding off ships for the end of the year," said Phil Flynn of at Price Futures Group in Chicago.
"There could be some end of year tinkering here for tax reasons with a shipment or two taking their sweet time to get to the Gulf," Flynn said.
Gasoline and distillate stockpiles showed steeper-than-expected builds, according to the API report, which was delayed from its normal Tuesday release by the New Year's holiday.
Traders will now await data from the U.S. government's Energy Information Administration (EIA), due out on Friday instead of the normal Wednesday release, for confirmation of the API report.
Other U.S. economic data released Thursday was mixed, with U.S. private-sector employment data coming in stronger than expected. A separate report showed the number of Americans filing new claims for unemployment benefits rose last wee, and traders will now be closely watching out for payrolls data coming out on Friday.
Data also showed the service sector of No.2 oil consumer China expanded in December, fueling hopes that the world's second-largest economy and top energy consumer is recovering. (Reporting by Matthew Robinson and Robert Gibbons in New York; Peg Mackey in London; Florence Tan in Singapore; Editing by Marguerita Choy, Alden Bentley and Leslie Gevirtz)