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UPDATE 1-Brent holds near $110, US gasoline stocks draw triggers demand hopes

* Cushing crude stocks fall 1.5 mln barrels, U.S. total gains - API

* Gasoline stocks fall 1.4 mln barrels, vs forecast for rise

* Ukraine eyed; East Ukraine city calm after battle

* Libya standoff emerges, Premier refuses to yield to successor

(Adds comments, updates prices)

SINGAPORE, May 29 (Reuters) - Brent futures edged up slightly on Thursday, holding near $110 a barrel amid hopes of improved demand from top oil consumer the United States as a sharp drop in the country's gasoline stocks added to recent data pointing to a stronger economy.

The brighter demand outlook is supporting prices, already at elevated levels due to concerns about a disruption in supplies from Libya and a widening rift between Russia, the world's top oil producer, and the West over Ukraine.

Still, investors see the market as prone to a correction as some believe recent gains are overdone.

Brent crude traded up 11 cents at $109.92 a barrel by 0509 GMT, off the day's high of $110, after settling 21 cents down. U.S. oil gained 25 cents to $102.97, after ending down $1.39 as traders booked profits ahead of a government report that is expected to show a build in overall crude stocks.

"Fundamentals haven't changed drastically, we know there are still issues in Libya and Ukraine," said Ken Hasegawa, a commodity sales manager at Newedge Japan.

"Both crudes are likely to fall because there have been lot of gains since the early part of May."

The U.S. benchmark fell more sharply than Brent overnight because it failed to breach key resistance at $105 a barrel, Hasegawa said. The contract may now slide further to below $100, he said. Similarly, the European benchmark may slip to $107.

Brent has recovered nearly 3 percent from a low of $106.85 touched on May 1, while the U.S. benchmark has gained more than 4 percent over the same period.

This increase, without any change to fundamentals, is making both contracts vulnerable to a correction, Hasegawa said.

"In the fundamentals, the strong growth in non-OPEC supply this year, centred in the U.S., coupled with OPEC's spare capacity, will not be challenged even by the more optimistic oil demand growth forecasts," BNP Paribas analysts said in a note.

"Geopolitical trends that could impact supply appear all but discounted."

Crude stocks in Cushing, Oklahoma, the delivery point for the U.S. benchmark, fell by 1.5 million barrels, data from industry group the American Petroleum Institute showed.

But overall inventories rose by 3.5 million barrels in the week to May 23 to 383.9 million, compared with analysts' expectations for an increase of 483,000 barrels.

In addition, gasoline stocks fell by 1.4 million barrels, compared to expectations for a 283,000-barrel gain.

MARKET OUTLOOK

"The summer driving season and healthy gasoline demand will support oil, but not help prices up further," Hasegawa said.

Investors are now awaiting data from the Energy Information Administration (EIA) due later in the day to gauge the demand outlook in the United States.

In Libya, acting prime minister, Abdullah Al-Thinni, refused to hand over power to a newly elected premier after questioning his legitimacy in a deepening confrontation among the OPEC nation's rival factions.

Investors are also watching the situation in Ukraine, where relative calm returned to the streets of Donetsk after the biggest battle of the pro-Russian separatist uprising in eastern Ukraine.

(Editing by Himani Sarkar)