* Protest group in Libya signals possible end to oil blockade
* WTI-Brent spread narrows as TransCanada fills pipeline
* U.S. crude inventories down 2.7 million barrels last week - poll
* Coming up: U.S. API weekly oil stocks at 2130 GMT
LONDON, Dec 10 (Reuters) - Brent crude oil fell towards $109 a barrel on Tuesday, extending losses for a second session on reports of a possible end to the months-long blockade of east Libyan oil terminals.
An autonomy movement blocking several oil ports in eastern Libya said it was set to begin trying to sell crude oil on its own if the government did not meet its demands.
The disruption has restricted Libyan oil output to 250,000 barrels per day (bpd), down from 1.4 million bpd in July, and supported the price of Brent.
Brent for January was down 26 cents at $109.13 a barrel by 1429 GMT, having risen briefly by more than $1 to a high of $110.45. Brent dropped 2 percent on Monday, its biggest loss in five weeks.
But U.S. crude oil were sharply higher on news of progress towards the opening of a major pipeline that will transport oil from the U.S. Midwest to the Gulf, helping drain surplus crude at the pricing point for the futures contract.
U.S. light crude futures for January were up 90 cents at $98.24 a barrel, their highest in six weeks, after their first decline in seven sessions on Monday.
TransCanada Corp began filling a 700,000 bpd pipeline that will transport crude from Cushing, Oklahoma, to Gulf Coast refiners. The company did not say when it expects the line to begin commercial service.
Weighing on Brent prices further were data showing China's industrial output rose by a 10 percent in November from a year earlier, slightly below market expectations. This followed mixed economic data from Germany on Monday.
"The industrial production figures that we saw out of China were a little bit disappointing, and the data we've seen out of Europe hasn't been particularly great either," said Michael Hewson, analyst at CMC Markets.
A fall in the value of the U.S. dollar helped to cap losses. The U.S. currency hit a six-week low against the euro, increasing the purchasing power for European consumers who have to buy oil in dollars on international markets.
Also supportive of prices was exporter group OPEC saying on Tuesday it had trimmed its crude oil output towards next year's global requirement, whittling away at a supply surplus that could weigh on prices.
Brent's premium to U.S. crude <CL-LCO1=R> narrowed to its lowest in four weeks as the market awaited data on U.S. crude stocks from industry group the American Petroleum Institute to be released at 2130 GMT for an indication of the supply situation in the United States.
U.S. crude oil stocks are forecast to have fallen for a second week last week by 2.7 million barrels, a Reuters poll of analysts showed.
(Additional reporting by Florence Tan and Manash Goswami in SINGAPORE; Editing by Christopher Johnson)