UPDATE 8-Brent's decline extends erosion of 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, 4:30 p.m. EDT
(Adds details on Syria/China; updates prices; adds new quote.)
NEW YORK, Sept 17 (Reuters) - Brent crude oil traded more than 2 percent lower on Tuesday after its largest drop in three months as a deal averting an imminent U.S. attack on Syria calmed fears of a disruption in Middle East oil supplies. The resumption of some Libyan output also put pressure on prices.
Traders were selling oil contracts and deflating a geopolitical risk premium built into the price as fears of a U.S.-led invasion of Syria abated, brokers said.
It remained to be seen whether new short positions, or bets the market would fall further, were driving prices down, brokers said.
China said it would take a serious look at a United Nations report that confirmed the use of sarin nerve agent in Syria, but like Russia, it has vetoed previous Western efforts to impose U.N. penalties. A spokesman for the Chinese foreign ministry said China supported the resolution of the issue under a U.N. framework and wanted a political resolution.
Libyan oil supplies are expected to rise to 400,000 to 450,000 barrels per day (bpd) as one of the biggest western oilfields, El Sharara, ramps up after workers resumed pumping on Monday.
"The increase in Libyan production has added selling pressure on top of a resolution over Syria's chemical weapons," said Gene McGillian, an analyst with Tradition Energy in Stamford, Connecticut.
Brent crude for November delivery was down $2.32 a barrel at $107.75 at 12:55 p.m. EDT (1655 GMT) after trading at a six-week low of $107.41. The contract dipped below the 200-day moving average at $108.52. The benchmark slid 2.4 percent on Monday, its steepest one-day decline since June 20.
U.S. crude for October delivery was down $1.43 per barrel at $105.16 a barrel after hitting a session low of $105, its weakest since Sept. 3. The contract expires at the end of trading on Friday.
Brent's deflating risk premium caused its premium over U.S. oil to narrow and hover at a three week low <CL-LCO1=R>. It was last trading at $3.20 per barrel.
Heating oil futures were also headed for their largest one-day percentage loss since June 20 and were last trading $2.99 a gallon.
U.S. gasoline futures traded at their lowest level in nine months at $2.64 a gallon as peak summer driving demand faded. Supplies remain robust as refiners switch specifications to winter from summer grade, which is harder to make. The contract was last trading at $2.65.
Investors were also selling commodities priced in the greenback as the currency strengthened on Tuesday, making oil more expensive. The U.S. dollar index, which measures the dollar's strength against a basket of currencies, was off the one-month low of $80.96 on Monday, and was last trading at $81.16.
"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.
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, Leslie Gevirtz and Andre Grenon)