UPDATE 7-Oil slightly higher for day, down for the week
* German business morale increases, outlook improves
* Brent, U.S. crude on track for 3 percent losses for week
* Coming Up: CFTC positions data 3:30 EST Friday
(Rewrites lead, updates prices)
NEW YORK, Feb 22 (Reuters) - Oil prices rose on Friday as German business sentiment improved, but crude futures still fell by the largest weekly margin of 2013 after a sell off in commodities markets earlier this week.
German business morale increased in February at the fastest pace in more than two years, the Munich-based Ifo think tank said, suggesting a rebound in Europe's largest economy after a dismal end to 2012.
Brent crude rose 57 cents to settle at $114.10 a barrel, but was down 3 percent on the week. U.S. crude futures rose 29 cents to settle at $93.13 a barrel, but were down 2.8 percent this week.
Oil fell sharply on Wednesday and Thursday on concern that the U.S. Federal Reserve may wind down its massive bond buying program earlier than expected.
Minutes from the Fed's recent policy meeting, released on Wednesday, suggested the central bank is re-examining its mid-term monetary policy, including its schedule for bond buying and holding interest rates near zero, which has served to drive demand for risky assets like oil.
Prices also eased after oil industry sources earlier this week said Saudi Arabia, the world's top crude oil exporter, expects to lift output in the second quarter, although the size of the production boost was not specified.
Traders on Friday tested oil's lower trading levels, and analysts said a price recovery could be short-lived if economic data next week do not signal more demand for crude.
"The height of the bounce - whether today or into next week - will provide an indication of whether oil market bullish sentiment is resilient or whether further urgent long liquidation is on tap," said energy specialist Tim Evans at Citi Futures in a research note.
Further weak economic data in the U.S. and Europe has added to concerns that a first-quarter rally for crude has been overdone. Brent is still up by almost 3 percent this year.
A report from the European Commission on Friday forecast that the euro zone economy will contract again in 2013, and caution ahead of this weekend's Italian election weighed on the euro, which fell for a third day, helping to limit gains in oil prices.
Concerns that impending sharp automatic U.S. spending cuts due to take effect on March 1 also weighed on oil and equity markets.
U.S. March RBOB gasoline futures were up nearly 2 cents and March heating oil was little changed.
The March refined products contracts, due to expire next week, were supported by U.S. government data released on Thursday showing inventories fell more than expected last week.
IRAN NUCLEAR TALKS
Tension between the West and Iran ahead of a resumption of talks on Tehran's controversial nuclear program next week continued to support oil prices.
Six world powers and Iran will meet for the first time in eight months on Feb. 26, but analysts remain sceptical that the talks can resolve an ongoing dispute over whether Iran is attempting to develop nuclear weapons.
The U.N. International Atomic Energy Agency (IAEA) said on Thursday that Iran has installed advanced centrifuges at its main uranium enrichment plant and Tehran may face more sanctions as U.S. lawmakers craft a bill to stop the European Central Bank from handling business from the Iranian government.
(Reporting by Joshua Schneyer and Robert Gibbons in New York, Dasha Afanasieva in London and Florence Tan in Singapore; Editing by Bob Burgdorfer)