REFILE-UPDATE 4-Oil rises on growth in U.S. manufacturing

(Repeats to fix typo in headline)

* U.S. manufacturing sector expands in September * China's factory activity shrinks for 2nd month in Sept * Japan's business sentiment worsens * Euro zone manufacturing points to a new recession By Dmitry Zhdannikov

LONDON, Oct 1 (Reuters) - Brent crude rose on Monday above $113 a barrel as better than expected U.S. manufacturing data offset fresh signs of weakness in China and Japan and evidence of a new recession in the debt-saddled euro zone.

The U.S. manufacturing sector expanded in September, shaking off three months of weakness as new orders and employment picked up, a report showed on Monday.

Brent extended gains after the report trading 70 cents up at $113.09 at 1409 GMT, recovering from losses of over 50 cents earlier in the day. U.S. crude futures rose over $1 to trade at $93.20.

"While cyclical activity indicators still paint the picture of a weak recovery, a turn is starting to become evident... Further interest rate cuts and looser fiscal policies will also boost confidence into year-end despite event risk around the U.S. fiscal cliff," said analysts from Merrill Lynch, who expect Brent to hit $120 per barrel before year-end.

Brent closed out the third quarter with its biggest three-month gain in 1-1/2 years, buoyed by supply risks in the Middle East and efforts among global central banks to stimulate flagging economies.

However, Monday started on a gloomy note with manufacturing data out of China offering more evidence of a seventh straight quarter of slowing economic growth in the world's No. 2 oil user. A survey in Japan also pointed to a worsening mood among businessmen, adding to the sour tone.

And in the euro zone manufacturing suffered the worst quarter for three years in the three months to September, pointing to a new recession.

"There's been a dramatic recovery from the pessimism in May - not particularly understandable when the euro zone's problems are far from over... Currently hopes rather than facts are what the bulls have hung their hats on," said Tamas Varga from PVM brokerage.

Brent gained 14.9 percent in the third quarter, following a steep drop of 20 percent in the second quarter, while U.S. crude rose 8.5 percent in the quarter after slumping 17.5 percent in April-June.

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The Institute for Supply Management (ISM) said on Monday its index of U.S. national factory activity rose to 51.5 from 49.6 in August, topping expectations for 49.7.

It was the first time since May that the index has been above the 50 threshold that indicates expansion in the sector.

The report helped ofset worries about Asian and European economies.

An official survey of factory managers in China remained in contraction territory for a second successive month in September despite improving slightly from a nine-month low in August, as the world's second-biggest economy struggles against cooling exports, factory output and fixed asset investment.

"The overall implication of the China PMI is moderately negative, suggesting Chinese manufacturers are still cutting production and reducing inventories, in light of the weak demand (especially domestic demand)," Citigroup said in a note.

The ECB will hold a policymakers' meeting on Thursday and traders will be closely watching ECB chief Mario Draghi's comments.

"Eurozone uncertainty, however, remains front and centre," said Jason Schenker, President of Prestige Economics in Texas.

The EU warned on Monday of an "economic and social disaster" if joblessness among young Europeans continued to rise, calling for a joint effort to combat record high unemployment in the countries which share the euro.

(Editing by Keiron Henderson)

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Keywords: MARKETS OIL/