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UPDATE 5-Oil falls to $69 as earlier rally fizzles

* U.S. drillers cut rigs for first time in three weeks

* Concerns of U.S. sanctions against Iran also support crude

* Rising Russian output, U.S.-China trade spat weigh (Recasts with falling prices)

LONDON, April 2 (Reuters) - Oil fell to around $69 a barrel on Monday, reversing an earlier rally, as a rise in Russian production and concern about a U.S.-China trade spat offset a drop in U.S. drilling activity.

U.S. drillers cut seven oil rigs in the week to March 29, bringing the total down to 797, the first decline in three weeks. The rig count is closely watched as an indicator of future U.S. oil output.

Brent crude, the international benchmark, fell 56 cents to $68.78 a barrel by 1358 GMT, having rallied to $70.04 earlier. U.S. crude slipped 75 cents to $64.19.

"Investors took their cue from falling U.S. drilling counts," said Wang Xiao of Guotai Junan Futures. "But increasing trade friction between China and the U.S. is likely to rock global markets and tarnish bullish sentiment in crude oil markets."

China increased tariffs by up to 25 percent on 128 U.S. products from Monday, escalating a spat between the world's biggest economies in response to U.S. duties on imports of aluminum and steel.

Trading volumes were lower than normal as many countries were still on Easter holiday.

Brent crude reached a 2018 high of $71.28 in January but has since struggled to rise above that level. Two rallies last week ran out of steam just beyond $71, a chart pattern known as a double top which is usually bearish.

Some analysts say prices are set for further gains, as concerns that Washington could reintroduce sanctions against Iran lend support.

"The Iranian factor is going to be a very significant input for the next four weeks," said Olivier Jakob of Petromatrix. "It is going to be an underlying support for the whole month."

U.S. President Donald Trump has threatened to pull out of a 2015 international nuclear deal with Tehran under which Iranian oil exports have risen. He has given the European signatories a May 12 deadline to "fix the terrible flaws" of the deal.

Oil has risen from a multi-year low near $27 in January 2016, helped by production cuts led by the Organization of the Petroleum Exporting Countries and Russia, which started in 2017 and are due to run until the end of 2018.

But Russian oil output rose in March despite the output deal, to 10.97 million bpd from 10.95 million bpd in February, Russian energy ministry data showed.

(Additional reporting by Meng Meng in Beijing and Henning Gloystein in Singapore; Editing by Susan Fenton and David Evans)