(Reuters) - Brent crude dropped below $124 a barrel on Thursday, after weak Chinese manufacturing data sparked concerns that energy demand growth could slow in the world's second-largest oil consumer. China's factory activity shrank in March for a fifth successive month, with the overall rate of contraction accelerating and new orders sinking to a four-month low, the HSBC flash purchasing managers index (PMI) showed on Thursday. "It's a surprising reading, and is contrary to improving monetary conditions and stabilizing external conditions," said Natalie Robertson, a commodities strategist with ANZ Bank in Melbourne. "It reflects Chinese demand on the ground, which has a significant impact on commodity markets." Brent crude shed 58 cents to $123.62 a barrel by 0654 GMT, after settling 8 cents up at $124.20 a barrel. U.S. crude was down 76 cents at $106.51. The benchmark rose $1.20 to settle at $107.27 on Wednesday. HSBC's PMI survey, the earliest indicator of China's industrial activity, fell back from February's four-month high, slipping to 48.1, and is likely to reinforce the more bearish views on China's economic trajectory. "Growth momentum could slow down further amid a combination of sluggish export new orders and softening domestic demand. This calls for further easing steps from the Beijing authorities," HSBC chief China economist, Qu Hongbin, said in a statement. Slowing activity could mean a further relaxation of monetary policy to help underpin growth in the world's second-biggest economy, but lingering inflation risks uncovered by the survey highlight the dilemma facing China's policymakers who are determined to keep a lid on prices. Asian shares gave back most of their earlier gains on Thursday after the data was released. EURO ZONE WORRIES WEIGH Oil prices also came under pressure from renewed worries about the euro zone debt crisis hitting oil demand. Portugal's core public deficit nearly tripled in the first two months of 2012, stoking concerns the country may miss its budget targets and follow Greece in requiring more rescue funds. Investors will now look to manufacturing data in Europe to be released on Thursday, with flash PMI estimates from across the euro zone forecast to show an overall improvement versus February, according to a Reuters poll. But losses in oil prices were capped by data showing U.S. crude stocks fell 1.16 million barrels to 346.29 million barrels in the week to March 16. A Reuters poll of analysts had forecast a 2.4-million-barrel build.. IRAN RISK Oil markets continue to be driven by the prospect of supply disruptions from Iran, analysts said. The market is now balancing Saudi assurances that it would make up for any supply shortfalls against the potential risk for the loss of oil from Iran amid tighter Western sanctions on Tehran over its disputed nuclear programme, they added. "The market remains stretched in terms of spare capacity in our view, and it is close to the point where the price-reducing effect of further output increases is likely to be countered by the price-increasing effect of perceived reductions in spare capacity," said analysts at Barclays Capital in a research note. South Korea would support a release by industrialized countries of oil from strategic reserves to help stem high prices, but has yet to receive a request from the International Energy Agency or its members to do so, a government source said on Thursday. Worries that the standoff between the West and Iran over Tehran's nuclear programme could hit supplies have lifted Brent prices by around 15 percent this year.

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