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UPDATE 2-Crude falls as flooding from Harvey roils U.S. oil industry

* U.S. oil falls in early trading

* Gives up some of Thursday's gains

* Turmoil from Harvey continues (Updates prices)

TOKYO, Sept 1 (Reuters) - U.S. crude futures fell in Asian trading on Friday, partly reversing sharp gains from the previous session, amid ongoing turmoil in the oil industry with nearly a quarter of U.S. refining capacity offline.

U.S. West Texas Intermediate (WTI) was down 27 cents, or 0.6 percent, at $46.96 barrel at 0434 GMT. The contract rebounded 2.8 percent on Thursday but is still heading for a weekly decline of 1.9 percent.

The new Brent contract for November delivery was down 8 cents, or 0.2 percent, at $52.78 barrel. The contract for October delivery, which ended trading on Thursday, closed up $1.52, or 2.99 percent, at $52.38 a barrel.

U.S. gasoline futures have rallied more than 28 percent to a two-year high above $2 a gallon, buoyed by fears of a fuel shortage days ahead of the U.S. Labor Day weekend's traditional surge in driving.

Gasoline for September delivery settled up 25.52 cents, or 13.5 percent, at $2.1399 on the last day of trading in the contract. Gasoline for October delivery was down 0.2 percent at $1.7750.

"It looks like everyone thinks that the hurricane will affect refining more than production," said Tony Nunan, oil risk manager at Mitsubishi Corp. "Production will come back faster than refining so it is just going to exacerbate the situation where there's too much oil."

Hurricane Harvey has killed more than 40 people and brought record flooding to the U.S. oil heartland of Texas, paralyzing at least 4.4 million barrels per day (bpd) of refining capacity, according to company reports and Reuters estimates.

The U.S. Department of the Interior's Bureau of Safety and Environmental Enforcement said that roughly 13.5 percent of oil production in the Gulf of Mexico was also shut in on Thursday.

The U.S. government tapped its strategic oil reserves for the first time in five years on Thursday, releasing 1 million barrels of crude to a working refinery in Louisiana.

Traders were also scrambling to redirect fuel to the United States.

U.S. crude stocks fell sharply last week even as refineries hiked output in the run up to Harvey's approach, the Energy Information Administration said on Wednesday.

That should encourage OPEC and non-OPEC members that are trying to restrict supplies to boost prices that are about half the level of three years ago.

Output from the Organization of Petroleum Exporting Countries (OPEC) in August fell 170,000 bpd from a 2017 high, a Reuters survey found, as renewed unrest cut supplies in Libya and other members stepped up compliance with their production-cutting deal with non-OPEC countries including Russia.

But market rebalancing may take longer than expected if production comes back in the United States and refiners cannot feed that output into flooded refineries.

"This hurricane has thrown a spanner in the works and rebalancing is delayed further than expected," Nunan said.

(Reporting by Aaron Sheldrick; Editing by Richard Pullin)