* Libyan prime minister seized and then freed
* Israeli tweet on Yom Kippur war spooks traders
* No CFTC data on Friday due to government shutdown (New throughout; updates to settlement prices.)
By Jeanine Prezioso
NEW YORK, Oct 10 Brent oil prices jumped close to $3 per barrel and ended with their largest gain in more than a month on Thursday on growing hope for a deal to extend funding of the U.S. government, and on concerns about supplies from Libya and the Middle East.
Brent prices gained double that of U.S. oil prices. Traders and brokers reported seeing a large selloff in the spread between Brent, the global benchmark, and the U.S. oil futures contract, which widened the prices between them to the most in one month.
Oil rose initially on news that Libyan Prime Minister Ali Zeidan was captured and held for several hours by a former rebel militia, prompting concerns of supply disruptions. Later in the morning, a Twitter post commemorating the Yom Kippur war spooked traders, who initially mistook it as news of a serious escalation in Middle East violence.
"The rumour seems to have got stuff going, plus there's a huge seller of the arb," said one broker.
The spread CL-LCO1=R had widened to as much as $8.98 per barrel to its widest since Sept. 2 and settled at $8.79, its widest settlement since early June.
Brent crude oil gained steadily across the session, but soared by as much as $2.88 per barrel after the Twitter post fanned through the market. The contract settled $2.74 per barrel higher at $111.80, after trading as high as $111.94. It was the largest one-day gain for Brent since Aug. 27.
U.S. crude settled $1.40 per barrel higher at $103.01 after trading as high as $103.57.
U.S. gasoline futures followed the rest of the complex higher and settled 2.9 percent higher, the largest gain in three weeks, at $2.6981 per gallon.
SHUTDOWN AND MIDEAST JITTERS
U.S. House of Representatives Republicans plan to offer President Barack Obama a short-term increase in the federal debt limit if he agrees to negotiate with Republicans on matters, including funding to reopen the government, which has remained in partial shutdown since last week.
U.S. stock markets were higher on news an agreement might be reached, but oil market watchers were sceptical.
The shutdown has closed key government offices, prevented the release of economic data and is overall expected to weigh on the U.S. economy and demand for oil in the world's largest oil consumer, brokers and analysts said.
The U.S. Energy Information Administration does not expect to publish its weekly oil inventory data next week. The government agency has said it had funds to continue operations through Oct. 11.
The U.S. Commodity Futures Trading Commission will not publish its weekly Commitment of Traders report due out on Friday.
"It's going to be interesting to note what traders do without the data," said Gene McGillian, an analyst with Tradition Energy in Stamford, Connecticut. "Uncertainty generally doesn't produce rising prices."
Oil traders were also on alert for signs of further disruption in supplies from the Middle East and Africa.
Libya's oil output recently recovered to 700,000 barrels per day after falling at mid-year to its lowest since the country's 2011 civil war after a combination of strikes, militias and political activists blocked the majority of Libya's oilfields and ports in late July. (Additional reporting by Robert Gibbons in New York and Alexander Winning in London and Jacob Gronholt-Pederson in Sinapore; Editing by Marguerita Choy, Jonathan Leff, Phil Berlowitz and Andre Grenon)