UPDATE 11-Crude oil benchmark Brent sees biggest one-day fall in two years

* U.S. crude inventories fall 12.6 million barrels in week - EIA

* Trump threatens tariffs on another $200 bln of Chinese goods

* U.S. could also consider waivers on sanctions against Iran

* Libya lifts force majeure on four oil ports (Updates with settlement prices)

NEW YORK, July 11 (Reuters) - Global benchmark Brent crude oil had its biggest one-day drop in two years on Wednesday as escalating U.S.-China trade tensions threatened to hurt oil demand, and news that Libya would reopen its ports raised expectations of growing supply.

Brent crude fell $5.46, or 6.9 percent, to settle at $73.40 a barrel. The decline was the largest one-day move on a percentage basis since Feb. 9, 2016. U.S. crude fell $3.73, or 5 percent, to $70.38 a barrel.

The sell-off began early in the session after Libya's National Oil Company said it would reopen ports which had been closed since late June.

"The headline on Libya was merely the trigger," said John Saucer, a vice president at advisory firm Mobius Risk Group in Houston, Texas. The sell-off intensified after news of a fall in U.S. crude oil inventories failed to reverse market sentiment.

"The scope of today's sell-off is unequivocally a speculative washout," said Saucer. Hedge funds and other money managers with bullish wagers appeared to pare long positions, pulling back from long positions added as crude approached three and a half year highs last month, Saucer said.

The selling pressure intensified as trade tensions between the U.S. and China raised concerns about demand. The specter of tariffs on a further $200 billion of Chinese goods sent commodities lower, along with stock markets, as tension between the world's biggest economies intensified.

"Escalating trade tensions between the U.S. and China has prompted risk aversion in today's trading session, which is evident in oil prices," said Abhishek Kumar, senior energy analyst at Interfax Energy in London.

Crude oil prices also fell as the U.S. dollar rose on Wednesday's surprisingly strong U.S. inflation report, which increased prospects that the Federal Reserve will raise interest rates twice more this year. A stronger dollar can weaken dollar-denominated commodities, like crude.

The dollar index, which measures the currency against a basket of six rivals, was up 0.7 percent over the day to a high of 94.702.

"Trade concerns have bitten today," said Michael McCarthy, chief markets strategist at CMC Markets. "If these tariffs are introduced, there will be an impact on global growth and demand." China is a top buyer of U.S. crude, and has said it could tax U.S. oil if trade tensions escalate.

Tripoli-based Libya National Oil Corp said on Wednesday four export terminals were being reopened after eastern factions handed over the ports, ending a standoff that had shut down most of Libya's oil output.

Libyan oil production has fallen to 527,000 barrels per day (bpd) from a high of 1.28 million bpd in February following port closures in late June, the NOC said on Monday.

"Libyan relief changes the conversation about spare capacity," said John Kilduff, a partner at Again Capital Management. Concerns about a lack of spare capacity had led crude to rally.

Prospects of a relaxation of U.S. sanctions on crude exports from Iran, the world's fifth-biggest oil producer, has helped push up oil prices in recent weeks, with both crude contracts trading near 3-1/2-year highs until Wednesday.

U.S. Secretary of State Mike Pompeo said on Tuesday that Washington would consider requests from some countries to be exempt from sanctions due to go into effect in November to prevent Iran from exporting oil.

Washington had previously said countries must halt all imports of Iranian oil from Nov. 4 or face U.S. financial restrictions, with no exemptions.

The market shrugged off bullish U.S. government data showing crude stockpiles slumped by nearly 13 million barrels last week, the biggest slide in nearly two years.. Supply to the U.S. market has also been squeezed by the loss of some Canadian oil production.

"In spite of the extraordinary draw in crude oil inventories, the market is under pressure after refiners produced a record amount of gasoline this week and in conjunction with a greater than expected build in distillate inventories," said Andrew Lipow, president at Lipow Oil Associates in Houston.

(Reporting by Jessica Resnick-Ault, additional reporting by Christopher Johnson in London and Aaron Sheldrick in Tokyo; Editing by Marguerita Choy, Richard Chang and Clive McKeef)