RTRS:UPDATE 4-Oil gains on China data, dollar weakness supports
* Obama, congressional leaders still deadlocked on shutdown
* Oil reached its highest in two weeks on Weds on Keystone start
* U.S. ISM non-manufacturing index; 1400 GMT (Recasts, adds quote, updates prices)
By Simon Falush and Alexander Winning
LONDON, Oct 3 (Reuters) - Crude oil was steady around $109 a barrel on Thursday as strong data from China and dollar weakness offset fears about the economic impact of a U.S. government shutdown.
Activity in China's services sector expanded at the fastest pace in six months in September as demand grew, cementing a modest pick-up in the world's second-largest economy.
"With the turnaround in economic indicators in a key emerging market economy like China, we can be positive that demand conditions for oil are going to be benign," said Harry Tchilinguirian, analyst at BNP Paribas.
Brent crude added 4 cents to $109.23 a barrel by 1040 GMT, after settling $1.25 higher in the previous session when it closed at a two-week high.
U.S. oil fell 43 cents to $103.67 a barrel, after ending $2.06 higher.
However, uncertainty on the United States budget and the possibility that it could dent demand kept prices in check.
President Barack Obama met with Republican and Democratic leaders in Congress on Wednesday to try to break a budget deadlock that has shut wide swaths of the federal government, but after more than an hour of talks no breakthrough emerged.
The uncertainty about the budget reassured investors that the Fed would not end its money printing any time soon which hit the dollar.
A weaker dollar supports commodities, which are priced in the greenback, as it makes them more affordable to holders of other currencies.
PIPELINE BOOST
Oil got a boost on Wednesday on news that TransCanada Corp's Keystone XL Gulf Coast pipeline would start up by the end of the year.
The pipeline will ship crude from the delivery point of U.S. oil futures at Cushing, Oklahoma, to Texas. A glut of oil at Cushing has depressed prices.
However, until the pipeline is completed, stockpiles will likely remain high. Crude inventories in the United States rose sharply last week as refinery utilisation fell, while the drawdown at Cushing slowed.
An easing of geopolitical risks in recent weeks has helped push oil from a peak of above $117 in late August.
U.S. Secretary of State John Kerry said on Thursday that the United States hopes to engage with the new Iranian administration, but Tehran must first prove it is willing to end a standoff over its nuclear weapons programme.
"If there is progress in the P5+1 talks with Iran, that will put some pressure on crude oil prices," said Olivier Jakob at Petromatrix in Zug, Switzerland. (Editing by Dale Hudson and Jason Neely)
