UPDATE 1-Brent breaches $125 on US crude stocks rise, possible ...

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* U.S. crude stockpiles up 3.6 mln bbls last week -API (Updates prices)

By Florence Tan

SINGAPORE, March 28 (Reuters) - Brent crude fell for a second session on Wednesday, breaching $125, on the possibility of a release of strategic oil reserves by the United States even after crude stockpiles in the world's largest oil user rose more than expected last week.

Oil remained supported by supply concerns on rising tensions between Iran and the West, production problems in the North Sea and bombing in South Sudan.

Brent May crude had fallen 74 cents to $124.80 a barrel by 0644 GMT. U.S. crude was down 80 cents to $106.53.

"Markets have arrived at a level where they probably need to see evidence of better economic growth and demand before they take things higher," said Ric Spooner, Sydney-based chief market analyst at CMC Markets.

"Tonight's numbers on U.S. oil inventories will be another piece of the j igsaw."

U.S.

"crude was down 80 cents to $106.53."Markets have arrived at a level where they probably need to see evidence of better economic growth and demand before they take things higher," said Ric Spooner, Sydney-based chief market analyst at CMC Markets."Tonight's numbers on U.S"crude stocks rose 3.6 million barrels last week, the American Petroleum Institute (API) said on Tuesday, against analysts' expectations for a 2.6 million barrels rise. {API/S]

"Crude prices could come under further pressure if U.S. official inventory data confirms expectations of a 2.5 million barrels build," ANZ analysts said in a note.

The United States has not changed its stance on tapping its emergency oil reserves, keeping "all options on the table" regarding its response to high oil prices, a government official said.

Federal Reserve Chairman Ben Bernanke told ABC News on Tuesday that it is too soon to declare victory in the U.S. economic recovery.

Data on Tuesday showed Americans were more worried about inflation in March than at any time in the last 10 months and consumer confidence waned in the wake of higher gasoline prices.

U.S. average gasoline demand fell 1.5 percent in the week to March 23, from the previous week, MasterCard said in its separate weekly Spending Pulse report.

Demand was off 7 percent from the year-ago period, the report said.

SUPPLY RISKS

A reduction in Forties crude supply and news that South Sudan's oil fields were bombed briefly pushed up oil prices on Tuesday.

Hopes of a quick restart of South Sudan's oil production were dashed after Sudan and South Sudan accused each other of launching fresh attacks on oil-producing areas either side of their contested border on Tuesday. Sudan said it hoped the conflict would not escalate into war.

In the North Sea, oil flows through the Forties pipeline have been curbed by the shutdown of Total's Elgin platform following a gas leak, oil traders said.

Ongoing tensions between the West and Tehran over its nuclear program also supported prices although a bill to ramp up Iran sanctions failed in the U.S. Senate on Tuesday.

(Reporting by Florence Tan; Editing by Ed Davies and Joseph Radford)

Energy