* Libya output rises to 580,000 bpd
* Fed says U.S. economic recovery remains incomplete
* Reuters poll sees U.S. crude stocks down 2 mln bbls
(Updates prices to settlement, adds Brent-WTI spread)
NEW YORK, July 15 (Reuters) - Oil prices dropped by as much as $2 on Tuesday, deepening their biggest slide this year as rising Libyan supplies and downbeat economic data sharpened concerns the global market was heading into a near-term glut.
World oil prices have rapidly erased a geopolitical risk premium that had been pushing prices up since April, and selling has accelerated in recent days as traders shift their focus from violence in Iraq and Libya to weak global fundamentals.
Despite ongoing fighting between militias in Tripoli, Libya's oil output has risen to 588,000 barrels per day (bpd), an increase of around 25 percent since the weekend, the acting oil minister told Reuters.
"There is a sense that the supplies are going to outweigh the demand in the short term," said Phil Flynn, an analyst at Price Futures Group in Chicago.
Brent futures lost 96 cents to settle at $106.02 a barrel, recovering from a low of $104.39 a barrel earlier in the session, the weakest point since April 2.
Brent prices have declined about 6 percent since the beginning of July, an abrupt selloff that continued this week as investors liquidated ahead of Wednesday's contract expiry.
U.S. crude lost 95 cents to settle at $99.96 a barrel. It had slipped to a low of $99.01 a barrel earlier in the session, breaking the 200-day moving average of $99.92, a key technical indicator closely watched by traders.
The spread <CL-LCO1=R> between the two benchmarks closed at $6.06.
The breakdown in prices has been concentrated in prompt Brent futures, with the first-month contract falling to its biggest discount versus second-month <LCOc1-LCOc2> in four years, a structure known as contango that typically signals a surplus of immediately available crude.
August/September ICE Brent <LCOQ4-U4> has fallen from parity to more than $1.10 a barrel, a dramatic slump in a spread that rarely turned negative over the past few years.
Other risk markets also fell on Tuesday after comments from U.S. Federal Reserve Chair Janet Yellen, who defended the central bank's loose monetary policy in testimony to a Senate committee. U.S. stocks slid after she raised concerns about "substantially stretched valuations" in some sectors.
DATA FUELS DEMAND WORRY
Despite rising supplies from Libya, concerns mounted after militia clashes in Tripoli closed the country's main airport, prompting the United Nations to evacuate its staff.
Traders were also eyeing the situation in Iraq, where politicians named a moderate Sunni Islamist as speaker of parliament on Tuesday, a first step toward a power-sharing government that could put an end to the Islamist insurgency that drove oil prices to nine-month highs in June.
As global oil supply remains solid, the oil markets are coming under pressure from weaker-than-expected economic data from some of the world's largest economies.
In China, lower global refining activity and weaker buying have decreased demand for crude oil, London-based consultancy Energy Aspects said in a note. Investors are awaiting June economic growth figures, due on Wednesday, to understand whether the world's top net oil importer needs further stimulus support.
In Europe, German investor confidence dropped in July for a seventh straight month to its lowest level since December 2012, a leading survey showed.
Investors are now watching for U.S. oil inventory reports due on Tuesday and Wednesday. Analysts polled by Reuters expect to see a 2-million barrel drop in crude stocks for the week ended July 11 based on increased refining activity.
(Additional reporting by Rowena Caine and Ron Bousso in London and Keith Wallis in Singapore; Editing by Marguerita Choy, Tom Brown and Peter Galloway)