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UPDATE 7-U.S. crude rises on small stock build, large draw at hub

* US crude discount to Brent narrows to less than $7/bbl

* US crude stocks rise by meager 68,000 barrels - EIA

* U.S. gasoline falls 2.8 million barrels - EIA

* Stocks at Cushing, OK draw for 4th week

(Updates prices, adds analyst commentary)

NEW YORK, Feb 26 (Reuters) - U.S. oil rose more than $1 per barrel on Wednesday after government data showed a surprisingly small build in crude oil inventories and another large draw from the American benchmark's delivery point.

Worries over China's growth capped gains in Brent.

The discount between U.S. crude and the European benchmark shrank early on Wednesday to its lowest since early October in anticipation of the data, which showed the fourth consecutive weekly drop in inventories at the Cushing, Oklahoma delivery hub.

The U.S. Energy Information Administration said crude stocks rose overall by just 68,000 barrels last week, far less than expected, while stocks at Cushing fell by 1.1 million barrels as TransCanada Corp's southern pipeline continued to drain oil to the Gulf Coast.

"The impact of the Keystone pipelines is on full display now and it's clearly supportive for prices," said John Kilduff a partner at Again Capital, LLC in New York.

U.S. gasoline inventories fell by 2.8 million barrels, much greater than the 1-million-barrel draw analysts expected, data showed. Analysts attributed the surprise drop to lower refinery output and warmer weather coaxing drivers back on the roads.

U.S. crude oil rose by more than $1, touching a high of $102.90 per barrel after the EIA data. The contract last traded 87 cents higher at $102.70 at 1:02 p.m. EST (1802 GMT).

Brent crude was up 17 cents to $109.68 a barrel.

U.S. crude's discount to Brent narrowed to as little as $6.72, the lowest price since Oct. 9, before widening back to around $7.

The spread has narrowed in recent weeks as storage has drained from Cushing, where prices were previously depressed, to refiners on the Gulf Coast. But analysts worry refiners' demand for U.S. crude could reach a limit.

"(It's unclear) that the Gulf Coast refineries really have strong enough demand to continue to pull that oil out of Cushing," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut. "If the spread drops down below $5, we'll see some of the strength let up."

Unrest in North African exporter Libya has cut supplies of oil since the middle of last year. More than 100 rockets fired in clashes between rival government-paid militia knocked out a power plant in southern Libya on Tuesday.

Oil markets are also watching the outlook for demand in China. The world No. 2 oil consumer's corporate debt has hit record levels and is likely to accelerate a wave of domestic restructuring and trigger more defaults as credit repayment problems rise.

Demand in the United States is also a major focus after data on Tuesday showed U.S. home price gains slowed in December, underscoring a loss of momentum in the housing recovery, while consumer confidence drifted lower this month.

However, the weakness in the housing sector may have been in part due to the bitter cold and severe snowstorms.

(Additional reporting by Anna Louie Sussman in New York, David Sheppard, Peg Mackey and Shadi Bushra in London, and Manash Goswami in Singapore; Editing by Dale Hudson, David Evans and Chris Reese)