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UPDATE 1-Brent steady above $110 on China PMI, lower US stocks

* China factory sector shows best performance in 5 months in May

U.S. crude stocks fell by 7.2 million barrels last week

* Libya's western oil fields remain closed

* Coming up: U.S. weekly jobless claims; 1230 GMT

(Adds analyst comment; updates prices)

By Jacob Gronholt-Pedersen

SINGAPORE, May 22 (Reuters) - Brent crude steadied near a 2-1/2 month high above $110 a barrel on Thursday, supported by a large draw in U.S. crude stocks and signs of improvement in China's manufacturing growth.

China's factory sector turned in its best performance in five months in May, a preliminary HSBC survey showed, suggesting a brighter outlook for demand in the world's No.2 oil consumer.

"This is positive for oil markets, because better-than-expected factory orders will increase demand for oil. And coupled with commentary from the Fed overnight, oil prices will be supported for the time being," said Ben Le Brun, market analyst with OptionsXpress in Sydney.

Brent crude fell 4 cents to $110.51 a barrel by 0522 GMT, just off a 2-1/2 month top of $110.73 reached in the previous session. U.S. crude eased 9 cents to $103.98 a barrel. The contract settled up $1.74 on Wednesday, its biggest one-day gain in six weeks.

Risky assets such as commodities were supported by minutes of the U.S. Federal Reserve's last meeting that reassured investors that policy makers will continue to support the economy.

Investors are now eyeing manufacturing numbers on Thursday from France, Germany and the euro zone, as well as U.S. weekly jobless claims for trading cues.

"If European (PMI) flashes also come in stronger than expected, then we should see a very compelling and positive end to the week across oil markets," Le Brun said.

U.S. CRUDE STOCKS FALL

Oil prices are currently drawing support from data showing a plunge in U.S. crude stocks last week as imports slumped to the lowest since 1997 amid rising domestic production.

Crude inventories in the world's biggest oil consumer fell 7.2 million barrels last week, the Energy Information Administration (EIA) said, compared with analysts' expectations for an increase of 750,000 barrels.

Crude stocks at the Cushing, Oklahoma, delivery hub fell 225,000 barrels, EIA said.

Renewed fighting in Libya also underpinned oil prices.

Explosions and heavy fighting with anti-aircraft guns could be heard near two military camps in Libya's capital Tripoli on Wednesday, witnesses said, two days after gunmen had stormed parliament in the worst violence in months.

The country's major western oilfields remain closed 10 days after the government said protesters blocking pipeline flows had agreed to leave, while total oil output edged higher, the National Oil Corp said.

Only the small 30,000-barrels-per-day (bpd) Wafa field was producing normally in the west, NOC said. Oil output in the OPEC-member was around 230,000 bpd, slightly higher than earlier this week at 210,000 bpd but well below the country's 1.6 million bpd capacity.

"The impending onset of stronger seasonal demand and continued supply disruptions in the Middle East and North Africa may see Brent find a new trading range between $110 and $115 a barrel in the coming months," analysts at ANZ said in a note.

(Editing by Himani Sarkar and Richard Pullin)