UPDATE 2-Brent rises toward $109 as China data points to recovery

* China Dec PMI firms, points to gradual economic recovery

* U.S. jobless claims drop to near 4-yr low; Nov retail sales rebound

* BP in talks to cut output target at Iraq's Rumaila field

(Updates prices)

SINGAPORE, Dec 14 (Reuters) - Brent crude rose toward $109 a barrel on Friday on a brighter outlook for China's economy, the world's second largest oil consumer, but worries about the impact of a possible U.S. fiscal crisis capped price gains.

Growth in China's vast manufacturing sector picked up in December, reinforcing recent indications of a revival in the country's economic recovery that could boost fuel demand. Further support came from strong employment and retail sales data from the United States - the world's No.1 oil consumer.

Brent crude is set to eke out its first weekly gain this month. The January contract, which expires later on Friday, rose 73 cents to $108.64 a barrel by 0743 GMT.

U.S. crude for January delivery was up 84 cents at $86.73 and on track for its fifth weekly gain in six.

"We're seeing positive PMI, industrial data and they are all pointing to the direction of an economic recovery," said Sijin Cheng, a commodities analyst at Barclays Capital.

"The underlying demand is going to improve gradually."

The HSBC flash purchasing managers' index for China rose to 50.9 for December, a 14-month high. Data released earlier this week showed that China's November crude imports matched the third highest daily rate on record as new refining units started operations.

Chinese officials are expected to maintain the 2012 economic growth target of 7.5 percent when they chart a course for 2013 at a meeting this weekend.

But a ceiling is expected to stay on oil prices for as long as a stalemate over how to avert the U.S. "fiscal cliff" of steep tax increases and spending cuts that kicks in early next year is not resolved.

Frustration mounted over the lack of progress in talks between the Democrats and the Republicans as the year-end deadline loomed, overshadowing data that showed a drop in new jobless claims last week to a near four-year low and a rebound in November retail sales.

"As each day comes and goes without a deal struck in Washington, investor anxiety over a potential fiscal freefall ratchets up a few extra notches," Tim Waterer, a senior trader at CMC Markets in Sydney said in a note.

OPEC SUPPLY

The Organization of the Petroleum Exporting Countries (OPEC) is relaxed about the prospect of rising inventories in the first half of next year, the group's secretary general said on Thursday, so long as oil prices avoid extreme moves from their current acceptable level.

The OPEC agreed on Wednesday to maintain its oil output target of 30 million barrels per day (bpd), a production level the group exceeded in November by 800,000 bpd.

But forecasts for lower demand suggest OPEC may need to cut output at some point next year.

However, Iraq has said it "will never cut production", adding that other OPEC producers should shoulder the burden of cuts if a reduction in supply is required.

The second largest producer after Saudi Arabia is falling behind production targets as logistical bottlenecks and weak infrastructure hampered investors' ability to ramp up output.

Oil major BP is close to reaching a deal with Iraq to cut the final production target for the supergiant Rumaila oilfield to between 1.8 million and 2.2 million bpd, down from 2.85 million bpd agreed in 2009.

(Editing by Himani Sarkar)