LONDON, Dec 21 (Reuters) - Oil prices rose to around $107 a barrel on Wednesday after the European Central Bank's first ever offer of three-year loans to banks raised hopes the euro zone would avert a liquidity crisis and head towards economic recovery.
The supply of limit-free and ultra-cheap cash boosted sentiment across financial markets after banks took up a greater-than-expected 489 billion euros.
The ECB's successful tender added to optimism after U.S. housing starts and building permits were shown to have jumped to a 1-1/2 year high in November.
Brent crude was up 22 cents to $106.93 a barrel by 1152 GMT after posting the biggest one-day percentage rise since mid-October on Tuesday to settle up by $3.09. U.S. crude gained 26 cents to $97.50 a barrel.
"Cheap funding from the ECB has boosted equity markets," said Michael Hewson, an analyst at CMC markets, adding that gains in stocks had fed through to riskier asset markets.
"But the economic fundamentals don't support the equity rally," he cautioned.
Italy's statistics bureau said the economy had slipped into what is expected to be a prolonged recession, and analysts predicted a steeper fall in the fourth quarter and further contractions thereafter as domestic demand slumps.
Fears of a recession in Europe's third-largest economy weighed against Tuesday's positive German business sentiment for December, underscoring its strength even as growth in neighbouring countries collapses.
Italy's disappointing economic data also contrasted with the outlook for Spain, which appeared to brighten after its short-term financing costs more than halved on Tuesday.
SUPPLIES
On the supply side, oil investors are worried the escalating tension with Iran over the country's nuclear programme may disrupt oil shipments from the world's fifth-largest exporter.
Diplomats from the United States, the European Union and other allies have agreed to step up pressure on Iran to force it to resume talks over its nuclear programme, an Italian diplomatic source said.
Supply from Iraq is also increasingly a concern. Iraqi authorities have issued an arrest warrant for Sunni Muslim Vice-President Tareq al-Hashemi on suspected ties to assassinations and bombings just as the United States has withdrawn.
"Look at Iraq. Within days of the U.S. announcement to withdraw troops, there is concern about growing differences between the various factions," said Tony Nunan, a risk manager at Mitsubishi Corp.
Adding to a tightening supply outlook, crude stocks in the world's largest oil consumer the United States fell twice as much as expected, an industry report showed on Tuesday. The American Petroleum Institute said domestic stocks fell 4.6 million barrels compared with expectations of a drop of 2.3 million barrels.
A clearer picture on inventory levels will be available once the Energy Information Administration releases its numbers later in the day.
That said, Saudi Arabia said it pumped over 10 million bpd in November, its highest in decades, to meet strong consumer demand. (Additional reporting by Francis Kan and Manash Goswami in Singapore, editing by Jane Baird)
