UPDATE 3-Oil up after Algeria attack, spare capacity caps gains

* Algeria attack lifts prices as Islamist militants take hostages

* Seaway pipeline expansion limits U.S. import needs

* Unexpected drop in U.S. crude stocks adds support

* OPEC sees weak crude demand in 2013, IEA report due Fri

* Coming Up: U.S. Housing starts Dec; 1330 GMT

(Changes dateline to LONDON, adds quote and commentary)

LONDON, Jan 17 (Reuters) - Brent oil futures rose above $110 per barrel on Thursday after Islamist militants attacked an Algerian gas field and took Western hostages, although concerns about a weak global economic outlook kept gains in check.

Brent added 32 cents to $110.00 a barrel by 1049 GMT. The February contract, which expired on Wednesday, settled 31 cents higher, while the March contract finished 5 cents up. U.S. oil rose 23 cents to $94.47.

Islamist fighters have opened up an international front in Mali's civil war by taking dozens of hostages at a gas plant in the Algerian desert just as French troops launched an offensive against rebels in neighbouring Mali.

However a rise in oil production in the United States prevented supply fears driving a big jump in prices, analysts said.

The expansion of the Seaway pipeline has unblocked more crude for the U.S. Gulf Coast refineries, limiting the demand for imports from the world's largest economy.

"The other impact of Seaway is that it has created spare capacity in Saudi Arabia," said Olivier Jakob of consultancy Petromatrix in Zug, Switzerland.

"In the last quarters, there was no spare capacity. Today we have recreated a capacity cushion so if we have a disruption now, (it lowers) the spike potential."

DOWNBEAT DEMAND

A series of data showing worsening economic conditions in Europe, the ongoing uncertainty surrounding an agreement over the U.S. debt ceiling and a forecast of weak crude demand in 2013 also kept prices subdued.

Worries about the global economy were revived on Wednesday after the World Bank cut its forecast for world growth in 2013 to 2.4 percent from its previous estimate of 3 percent.

Data showing the European car market weakened to a 17-year low reinforced that view, while prospects of an extended battle over the fiscal crisis in the United States further undermined investor confidence.

The decline in economic activity may lead to poor energy demand, and the Organization of the Petroleum Exporting Countries (OPEC) cut its demand forecast for its crude in 2013 by 100,000 barrels per day to 29.65 million bpd.

OPEC's is the second of this month's three closely watched supply and demand reports to be released. The U.S. government's Energy Information Administration last week trimmed its 2013 demand growth forecast by 20,000 bpd.

The International Energy Agency, adviser to 28 industrialised countries, issues its report on Friday.

A surprise fall in crude inventory in the United States, the world's biggest oil consumer, offered some support to oil.

U.S. crude stocks fell by 951,000 barrels to 360.3 million barrels last week as imports dropped and fuel stocks rose, weekly data from the U.S. Energy Information Administration showed on Wednesday. Analysts polled by Reuters had expected stocks to rise of 2.3 million barrels.

"The decline in crude use has taken place from previously elevated levels that had been encouraged by good refining margins," BNP Paribas analysts said in a report.

Imports fell by 312,000 barrels per day (bpd) to 7.99 million bpd in the week. Gasoline supply rose by 1.91 million barrels, compared with analyst expectations for a 2.9 million barrel climb.

(Additional reporting by Ramya Venugopal; editing by Tom Hogue and Jason Neely)