UPDATE 7-Brent extends rally to hit 2-1/2 month high on Libya, China

* Front-month Brent highest since March 4

* Libya's western oilfields stay closed

* Strongest Chinese factory data for five months

* U.S. home resales rise in April

* U.S. crude stocks fell by 7.2 mln barrels last week

(Rewrites throughout with updated prices, analyst's view; changes byline, dateline, previous LONDON)

NEW YORK, May 22 (Reuters) - Brent crude oil rose to a 2-1/2 month high on Thursday, continuing a two-day rally backed by ongoing violence in Libya and positive economic data in China and the United States, but U.S. crude retreated modestly from the previous session's gains.

Both benchmarks surged in price Wednesday after a U.S. Energy Information Administration report showed crude stocks fell by 7.2 million barrels last week, with stocks at the Cushing, Oklahoma, delivery hub falling 225,000 barrels.

The ongoing conflict in Libya underpinned prices as the OPEC member's major western oilfields were still closed, while protesters shut the headquarters of a state oil company that runs the only eastern oil port that remained open during the nine-month stand-off with rebel groups.

The government said nearly two weeks ago it had reached an agreement with rebel groups allowing the fields to reopen. But negotiations have stopped due to intense fighting in major cities, while a renegade general's troops stormed the nation's parliament.

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

U.S. home resales rose in April and the supply of properties on the market hit its highest level since August 2012, hopeful signs for the stalled housing market recovery. However, other data showed a jump in jobless claims.

Brent crude was up 15 cents at $110.70 a barrel at 11:39 a.m. EDT (1539 GMT), after settling up 86 cents at $110.55 a barrel on Wednesday. U.S. crude was down 19 cents at 103.88 a barrel, after settling up $1.74 on Wednesday, its biggest one-day gain in six weeks.

"It's interesting that the broader country is down 7.2 million barrels...and now that we have the ability to get the crude to the coast (from Cushing), that's supporting Brent as well," said Phil Thompson, director, Mobius Risk Group in Houston, Texas.

"In Libya, the last year has been dominated by rumors of deals about reopening the ports and fields. But the parliament attack is a reminder of how bad things can get there fast," Thompson added. "It's almost back to the instability when (ousted leader) Gaddafi was removed from power."

Libya's output held at 230,000 barrels per day (bpd), well below the country's 1.6 million bpd capacity.

Investors also kept an eye on the ongoing conflict in Ukraine, where presidential elections are scheduled for Sunday.

Lending background support, minutes of the U.S. Federal Reserve's last meeting released Wednesday reassured investors that policymakers would continue to support the U.S. economy and would not yet ease monetary policy.

Floor trading will be closed on Monday and there will be no settlement on the New York Mercantile Exchange due to the U.S. Memorial Day holiday.

(Additional reporting by Christopher Johnson in London and Jacob Gronholt-Pedersen in Singapore; Editing by William Hardy, Jane Baird and Peter Galloway)