Oil erases most gains on Europe ratings worry

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NEW YORK (Reuters) - Oil prices gave up early gains on Monday after the euro slipped against the dollar on a report that several major European countries may be put on "creditwatch negative" by ratings agency Standard & Poor's.

Oil's late slide erased most early gains that came on fears that shipments of Iranian crude could be disrupted by rising tensions between a leading OPEC producer and western countries.

Oil prices had already pared those early gains as data showed slowing service sectors in China and the United States. The retreat accelerated after the Financial Times reported that S&P had warned the European countries about potential credit downgrades.

At the same time, hopes for a breakthrough summit of European policymakers on Friday for a firm plan to the region's debt crisis also gave way to some skepticism that a durable solution could be forged.

In London, ICE Brent crude settled at $109.81 a barrel, down 13 cents after rising to $111.62 early. Last week, Brent rose more than 3 percent, its biggest weekly gain since mid-October.

U.S. crude eked out a 3 cent gain at $100.99, after hitting $102.44, highest intraday since November 17. U.S.

"Last week's storming of the British Embassy in Tehran has sparked tougher action against Iran, the world's fifth largest oil exporter, which is thought to be working on a nuclear bomb."The risk of disruptions to oil supplies remains high," said Christophe Barret, global oil analyst at Credit Agricole CIB"crude rose 4.3 percent last week.

Trading volumes were light, with Brent crude down 32 percent from its 30-day average. U.S. crude oil dealings were 35 percent lower than its 30-day average.

Brent's premium against U.S. crude narrowed slightly to $8.82 at the close, from $8.98 on Friday.

After oil prices had settled, Standard & Poor's issued a statement saying it had placed the sovereign ratings on 15 euro zone countries on CreditWatch with negative implications.

EURO SLIPS, IRAN WARNING

In earlier trading, the euro surrendered gains against the dollar after the Financial Times reported that six major European countries, including France and Germany, may receive ratings downgrades from S&P.

A pricier dollar usually prompts investors using non-U.S. currency to trim their holdings of risky assets such as oil.

"The price decline late in the session appeared driven by reports that S&P may be downgrading some European nations including Germany," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.

Prices rose early after Iran warned on Sunday that any move to block its oil exports would more than double crude prices, with ruinous consequences for a fragile global economy.

The European Union is considering a ban -- already in place in the United States -- on Iranian oil imports.

Last week's storming of the British Embassy in Tehran has sparked tougher action against Iran, the world's fifth largest oil exporter, which is thought to be working on a nuclear bomb.

"The risk of disruptions to oil supplies remains high," said Christophe Barret, global oil analyst at Credit Agricole CIB. An embargo on Iranian oil "would introduce severe disruption to refining in several EU countries," he said.

Speculation about possible military strikes on Iranian nuclear sites have raised the oil risk premium, Barret added, though U.S. Defense Secretary Leon Panetta argued against such action on Friday, saying sanctions and diplomatic pressure were working.

President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany agreed on a master plan for imposing budget discipline across the euro zone, but said the EU's basic treaty need to be changed to adopt sweeping solution to its debt crisis.

"The plan is so wide-ranging that after the initial reaction, investors lost some enthusiasm as reality set in once again," said Phil Flynn, analyst at PFGBest Research in Chicago.

U.S., CHINA DATA

Data from the Institute of Supply Management showed that growth in the U.S. services sector, a major chunk of the U.S. economy, slowed in November.

New orders for U.S.

"An embargo on Iranian oil "would introduce severe disruption to refining in several EU countries," he said.Speculation about possible military strikes on Iranian nuclear sites have raised the oil risk premium, Barret added, though U.S"factory goods fell in October, a Commerce Department report showed. And a HSBC purchasing managers' index showed growth in China's services sector cooled in November to its weakest in three months.

Meanwhile, oil ministers from OPEC members Kuwait, Oman and Bahrain said the market was well supplied, echoing comments by Qatar's energy minister and the OPEC Secretary-General Abdullah al-Badri at the weekend.

OPEC will meet next week in Vienna, but with Iran holding the group's presidency until the end of the year, analysts do not expect much from the meeting.

(Additional reporting by Claire Milhench in London, Francis Kan in Singapore; Editing by David Gregorio)