* Unexpected increase in crude stocks weighs on U.S. oil * Rising demand, reduced output put floor under crude -analyst * Brent neutral in $115-$120/bbl range -technicals (Updates prices, adds quote, changes dateline, previous Singapore) By Simon Falush LONDON, July 27 (Reuters) - Oil fell on Wednesday as partisan wrangling over the U.S. debt limit unnerved investors and sent them fleeing from assets perceived to be dependent on growth. Brent LCOc1 fell 12 cents to $118.16 a barrel by 0841 GMT, U.S. oil CLc1 dropped 36 cents to $99.23, also pressured as an industry report showed crude stocks in the country rose unexpectedly. Republican and Democratic leaders were scrambling to find common ground over deficit cuts with less than a week before the government hits its borrowing limit approved by Congress. Lawmakers have less than a week left to thrash out a deficit-cutting plan without which Republicans in Congress have said they will not raise the legal $14.3 trillion debt limit. "The main factor is the debt situation(in the United States), there are fears about growth and the country's AAA rating is under threat," Michael Hewson, analyst at CMC Markets said. Analysts polled by Reuters expect the United States will probably lose its top-notch AAA credit rating from at least one major rating agency, believing the wrangling over the debt ceiling has already damaged the economy. Bank of Japan board member Hidetoshi Kamezaki said that global growth is slowing and there is uncertainty about its outlook as emerging nations battle rising costs and the debt crisis in the U.S. and Europe threaten to derail recovery. An unexpected rise in crude oil inventories also weighed on prices as data from oil industry group American Petroleum Institute showed weekly refinery operations fell. Crude stocks rose by 4 million barrels confounding analysts' expectations for a 1.7 million-barrel draw in a Reuters poll. UNCERTAINTY UNNERVES The U.S. Congress faced more uncertainty as Republican leaders delayed action on a plan to raise the ceiling, narrowing the chances for a deal to avert a debt default. "Until the path to global economic growth is ascertained, it will be difficult for oil markets to focus on much else, Barclays Capital said in a report. "After all, economic growth is one of the biggest drivers of oil prices." Sovereign debt will remain a key factor capping the upside in prices in the immediate future, the report said. Debt problems in Europe, notably in Italy and Greece, while not the main focus of investor concern on Wednesday, were also keeping investors wary of risky assets, analysts said. The dollar sank to a three-month low against a basket of major currencies on Wednesday, though it subsequently recovered slightly. A weak dollar can support dollar-denominated oil by making it less expensive for consumers using other currencies and by luring yield-hungry investors to commodities markets. Still, most analysts expect the debt ceiling issue to be resolved before the deadline and oil prices to be supported by reduced output amid growing demand from China, India and other emerging nations. Libya being away from the oil market has already reduced OPEC's spare capacity, and concerns of disruptions from other countries will boost prices for the rest of the year, analysts said. (Additional reporting by Manash Goswami in Singapore; Editing by Alison Birrane)

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