* Brent down more than $3 during session
* Dollar reaches two-week high against euro
* U.S. manufacturing expands at fastest rate in 2-1/2 years
(Updates prices to settlement, adds CFTC data)
NEW YORK, Nov 1 (Reuters) - Brent oil fell sharply on Friday, tumbling by nearly $3 a barrel, and settling at its lowest point since early July, narrowing its premium to U.S. crude in heavy selling.
Traders shrugged off Libya's oil supply outage and instead focused on a strong dollar and a supply overhang that set an overall bearish market tone.
U.S. crude oil futures sank to the lowest since June, while Brent ended with its largest daily percentage loss also since June. Brent's steeper losses narrowed its premium over WTI <CL-LCO1=R> by $1.16 from Thursday's close, after it hit a seven-month high of $13.60 in the previous session.
Brent crude for December delivery settled down $2.93 at $105.91 a barrel, a loss of 2.7 percent, its largest daily percentage loss since June 20. The last time Brent settled lower was on July 4 at $105.54.
U.S. oil for December fell $1.77 to settle at $94.61, posting a fourth straight week of losses and its longest losing streak since June 2012. It was the lowest settlement price for the U.S. contract since June 21 at $93.69.
"We have weak fundamentals in the oil market, and once we broke $95 in U.S. crude, the whole complex came under pressure," said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.
Brent prices drooped as traders sold positions to take profit, McGillian added.
An industry report showing the U.S. manufacturing sector expanded at its fastest pace in 2-1/2 years in October strengthened the dollar to its highest in more than one month.
A firmer dollar makes commodities priced in the greenback more expensive for overseas investors.
The dollar index, which measures the greenback against a basket of six major currencies but is dominated by the euro, rose 0.7 percent to its highest since mid-September.
"The euro currency has fallen a lot, which translates into some dollar strength. We're really in a bearish market that is latching onto the bearish news," John Kilduff, a partner at Again Capital, said.
Concerns over supply from Libya wavered as North Sea oil fields returned from maintenance, said Harry Tchilinguirian, an oil analyst at BNP Paribas in London.
Months of disruptions in OPEC-member Libya have slashed oil exports and rekindled supply worries, pushing Brent to a one-month high of $112 a barrel on Oct 10.
Supplies of North Sea crude that underpin the Brent benchmark are set to reach a 2013 high in November, loading programs showed.
Healthy stockpiles of crude, including significant stocks of oil in the U.S. Gulf Coast, the nations' refining center, have pressured prices lower.
"The market's obviously concerned on the supply side," said Andy Lebow, vice president at Jefferies Bache in New York.
Still, speculators had bet on rising prices as recently as mid-October, government data showed on Friday. Money managers raised their net long U.S. crude futures and options positions in the week to Oct. 22, lifting them from the lowest level since June, U.S. Commodity Futures Trading Commission (CFTC) data showed.
(Additional reporting by Jeanine Prezioso in New York, Alexander Winning in London and Manash Goswami in Singapore; Editing by Alden Bentley and Marguerita Choy)