UPDATE 7-Brent's decline continues eroding Mideast fear premium
* Crude falls further after sharpest drop in almost 3 months
* Easing tensions over Syria reduce risk premium
* Big western Libya oilfield set to resume production
* Fed tapering seen likely, may hurt oil prices further
* Coming up: U.S. API oil inventories report at 4:30 p.m. EDT
(Adds details on Fed, fresh quote; updates prices; previous London)
NEW YORK, Sept 17 (Reuters) - Brent crude oil continued to slide on Tuesday after its largest drop three months as a deal averting any imminent U.S. attack on Syria calmed fears of a Middle East oil supply disruption and some Libyan output resumed.
Investors primarily took long bets in Brent off the table and booked profits from a three-week run-up in prices as oil supply from the Middle East appeared more stable.
U.S. crude oil futures were headed for a third session of losses as investors sold commodities priced in the greenback anticipating that the U.S. central bank will signal tighter monetary policy that may strengthen the dollar sometime in the next two days.
Commodities priced in dollars become more expensive to hold as the dollar strengthens.
"The dollar has been in a down trend," said Bill Baruch, senior market strategist at iitrader.com in Chicago. "Now you're seeing some profit taking in crude off the highs ahead of the Fed meeting. People are just shoring up positions."
The U.S. Federal Reserve begins a two-day meeting on Tuesday and is expected to cut its monthly, $85 billion, bond purchases by at least $10 billion as it begins to close the era of cheap money that has boosted the flow of funds into commodities.
The market continued to absorb news of a deal negotiated by Russia and the United States on eliminating Syria's chemical weapons without a U.S.-led military strike.
As well, oil supplies from Libya, hit this year by unrest and strikes, are expected to rise to 400,000-450,000 barrels per day (bpd) as one of the biggest western oilfields, El Sharara, ramps up after workers resumed pumping on Monday, deputy oil minister Omar Shakmak said.
Oil production in Libya is still far below its pre-war level of 1.6 million bpd, but officials say output from other oilfields could resume soon.
Brent crude for November delivery fell $1.71 a barrel to $108.36 at 11:28 a.m. EDT (1528 GMT), after trading to a one-month low of $108.12. The benchmark slid 2.4 percent on Monday, its steepest one-day decline since June 20.
Brent has lost more than 7 percent since hitting a six-month peak of $117.34 in late August when a U.S. military strike against Syria appeared imminent.
U.S. crude for October delivery was down 76 cents at $105.83 a barrel, after hitting a session low of $105.50, its weakest since Sept. 3. The contract expires at the end of trading on Friday.
Deflating oil prices on both sides of the Atlantic kept the spread between the two crude benchmarks <CL-LCO1=R> narrow, around $3-$4 per barrel in the last two sessions. The spread was last trading at $3.19.
The U.S. dollar index, which measures the dollar's strength against a basket of currencies, was trading near a one-month low of $80.96 made on Monday and was last trading at $81.16.
U.S. gasoline futures traded to their lowest level in nine months at $2.67 a gallon as peak summer driving demand fades and supplies remain robust. The contract was last trading at $2.68.
Investors also awaited U.S. oil inventories data from the American Petroleum Institute (API) industry group at 4:30 p.m. EDT, and the U.S. Energy Information Administration due on Wednesday at 10:30 a.m. EDT.
A Reuters survey of analysts suggested U.S. commercial crude oil stockpiles fell last week by around 1.4 million barrels, while distillate inventories probably rose slightly.
(Additional reporting by Christopher Johnson in London and Manolo Serapio in Singapore; Editing by William Hardy, Dale Hudson and Leslie Gevirtz)