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UPDATE 12-Oil slides on weak demand outlook, Ukraine fears subside

* Dialogue used to resolve Ukraine issues - U.S.' Kerry

* Brent/WTI spread widens after reaching 5-month low

* Brent drops below 200-day moving average

(Rewrites throughout, updates to settlement prices, adds analyst's quote)

NEW YORK, March 5 (Reuters) - Oil prices slid nearly $2 per barrel on Wednesday as U.S. government data reflected weaker oil demand as Europe and the United States head into spring and refiners move into maintenance season.

Prices also dropped as traders sold off the geopolitical risk premium accrued on Monday on fears of escalating tension in Ukraine. Those fears mostly subsided by Wednesday as U.S. Secretary of State John Kerry said the related parties agreed to resolve tensions through dialogue.

Stocks of distillates in the U.S., which include heating oil, rose unexpectedly last week by 1.4 million barrels, data from the U.S. Energy Information Administration (EIA) showed, compared with a forecast of a 1.2-million-barrel draw, indicating slack demand as temperatures are expected to warm.

In the meantime, oil stocks at benchmark delivery point Cushing, Oklahoma, fell for the fifth straight week, the data showed.

U.S. oil's discount to Brent <CL-LCO1=R> narrowed to a five-month low of $5.44 per barrel ahead of the data's release as traders correctly priced in expectations that it would show a decline in oil supplies at Cushing.

The spread later widened to settle at $6.31 as traders sold contracts to cover those bets.

Weaker-than-expected U.S. payrolls data and confirmation by the U.S. Federal Reserve that severe winter weather across much of the United States in the last two months led to slower economic growth also weighed on prices.

"I think that the disappointing economic data kind of set a negative tone," said Gene McGillian, energy analyst with Tradition Energy in Stamford, Connecticut. "If it weren't for the Cushing draw, the build in distillates would have sent us even lower."

Brent oil for April delivery settled $1.54 lower at $107.76. The contract hit $112.39 on Monday, its highest since Dec. 30, but it had settled below the key 200-day moving average of $108.41 on Wednesday the first time one month.

U.S. crude for April delivery ended the day $1.88 lower at $101.45.

U.S. oil refiners are expected to increase the amount of capacity they take offline this week, data from research company IIR showed on Wednesday, which could further backlog supplies in the U.S. Gulf Coast and temporarily depress prices.

Losses in Brent were limited by news that China expects its economy to grow at the same pace in 2014 as it did last year, potentially boosting oil demand in a country set to overtake the United States as the world's largest crude importer.

Brent also drew some support from continued unrest in Libya, where oil output has dropped to around 230,000 barrels per day from 1.4 million bpd in July as protests have hit oilfields and ports.

In Libya, top officials said on Tuesday they were looking into the demands of protesters who have blocked the 340,000 bpd El Sharara oilfield, but a field manager said on Wednesday there was no sign production was about to resume.

(Additional reporting by David Sheppard and Shadi Bushra in London, Anna Sussman in New York and Jacob Gronholt-Pedersen in Singapore; Editing by Jason Neely, Dale Hudson, Peter Galloway, Bernadette Baum and Marguerita Choy)