UPDATE 7-Oil falls as U.S. government shutdown weighs on economy
* Obama, congressional leaders still deadlocked
* Tropical Storm Karen heads for U.S. Gulf Coast
* U.S. dollar index hits fresh 8-month low
(New throughout. Adds new quotes. Updates prices. Changes byline/dateline to NEW YORK, previous London.)
NEW YORK, Oct 3 (Reuters) - U.S. oil fell on Thursday despite some positive economic data in China, as investors worried that the U.S. government shutdown could cut energy demand in the world's largest oil consumer.
The U.S. budget crisis has closed Federal agencies, cut into programs, and sent nearly a million government workers home without pay. It has also weighed heavily on the market, said Mark Waggoner, president with Excel Futures in Bend, Oregon.
Traders were "establishing new short positions," he said, or bets that prices will further fall.
"The market will go lower ultimately because your demand in the U.S. is starting to wane and the economy will slow down based on what's going on," Waggoner said. On the third day of the U.S. government shutdown, Republicans and Democrats in Congress showed little signs of movement toward compromise, and concerns were growing about economic consequences of a prolonged stalemate.
The shutdown will prevent Friday's scheduled release of the U.S. Labor Department's monthly jobs report, a closely watched barometer for how the economy is faring.
Brent crude was 14 cents lower in choppy trade at $109.05 a barrel by 11:28 a.m. EDT (1505) GMT. Brent managed above the 15-day moving average of $109.15 for the first time in close to a month.
U.S. oil was trading 75 cents lower to $103.35 a barrel, after ending the previous session with its largest daily percentage gain in two weeks.
Positive economic data from China, the world's second largest oil consumer, failed to draw further buying in late morning trade. China's services sector expanded at the fastest pace in six months.
The pace of growth in the U.S. services sector slowed in September, and the number of Americans filing new claims for jobless benefits edged higher last week even while remaining at pre-recession levels.
Stocks were lower, also weighing on oil prices, analysts said. The U.S. dollar hit a fresh eight month low against a basket of currencies at $79.703 and was last trading at $79.725, putting a floor under losses.
A weaker dollar is generally supportive of commodities priced in the greenback since it makes them more affordable to holders of other currencies.
A tropical storm headed for the U.S. Gulf Coast had forced producers to shut in some oil and gas production but it was unclear how much of a prolonged impact the storm would have.
Offshore Gulf of Mexico accounts for about a fifth of total U.S. crude oil production.
(Editing by William Hardy and David Gregorio)