UPDATE 3-Brent crude oil below $125, supply worries support

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* U.S. weighs release of oil reserves as world frets about Iran

* Brent's upside limited to $126.53/bbl -technicals

* Coming Up: U.S. pending homes index at 1500 GMT (Updates throughout, changes dateline, previous SINGAPORE)

By Christopher Johnson

LONDON, Feb 27 (Reuters) - Brent crude slipped below $125 on Monday, flagging after five days of gains pushed oil to 10-month highs on worries tension over Iran's disputed nuclear programme could lead to a disruption in Middle East supplies.

Brent has risen 16 percent this year, after a 13.3 percent gain in 2011, helping weaken recent strong correlations with stock markets. It has also raised fears of strains on some of the world's weaker economies, particularly in Europe.

Investors are concerned escalating confrontation between Iran and the United States and its allies could mean the loss of substantial quantities of Iranian oil on world markets, or even hit other oil exports through the Strait of Hormuz in the Gulf.

Front-month Brent fell $1.71 to $123.76 a barrel before recovering slightly to around $124.20 by 0900 GMT. U.S.

"crude oil slipped $1.26 to a low of $108.51."Oil is pausing for breath after a period of very strong gains," said a dealer at a large U.S.-owned brokerage in London.Ken Hasegawa, a commodity sales manager at Newedge, agreed:"There were big gains in the oil market in the last 10 days because of the Iran issue," he said"crude oil slipped $1.26 to a low of $108.51.

"Oil is pausing for breath after a period of very strong gains," said a dealer at a large U.S.-owned brokerage in London.

Ken Hasegawa, a commodity sales manager at Newedge, agreed:

"There were big gains in the oil market in the last 10 days because of the Iran issue," he said. "We may see prices come down $2 to $3 a barrel in the next few days unless there is some change in the fundamental factors."

Even if there is a correction, tensions in the Middle East have created a new, higher range for oil, Hasegawa said. Brent may trade between $110 and $125 over the next two to three months compared with $105 to $115 earlier this year. U.S. oil may range from $95 to $110 against $95 to $105, he said.

Oil may also have pared gains as Saudi Arabia has increased exports sharply in the past week and is offering extra supplies to its biggest customers worldwide in what industry sources said appeared to be a bid to tame runaway prices.

FEARS OF SUPPLY DISRUPTION

Comments by U.S.

Treasury Secretary Timothy Geithner that the Obama administration was weighing the circumstances that could warrant tapping the nation's strategic oil reserves may have prompted investors to book profits.

"It is taking a lot of pressure off prices," said Ben Le Brun, markets analyst at OptionsXpress. "It is definitely in the United States' interest to do so. Oil at this level is very detrimental for the United States and the global economy."

Iran has stepped up a uranium enrichment drive, the U.N. nuclear agency has said. The increase of work that can have both civilian and military purposes underlines the fact that Tehran has no intention of backing off from a long-running dispute with the West that has sparked fears of war.

The U.N.

""We may see prices come down $2 to $3 a barrel in the next few days unless there is some change in the fundamental factors."Even if there is a correction, tensions in the Middle East have created a new, higher range for oil, Hasegawa said"report heightened fears of a supply disruption and could stoke worries in Israel, which has threatened Iran with pre-emptive strikes on nuclear sites. That would send shockwaves across the region and drive oil even higher.

Western powers are increasingly at loggerheads with Iran over its efforts to generate nuclear power. Iran insists it wants to harness atomic energy for peaceful ends, but the West suspects it is trying to acquire nuclear weapons.

The International Monetary Fund has already flagged higher oil as a rising threat to the global economy.

The warning comes days after data showed China's manufacturing sector contracted in February for the fourth straight month as new export orders dropped sharply in the face of the euro area debt crisis.

"At these levels, prices do have the potential to begin to impact on consumer spending and economic activity and have started to become more of a concern to the top consumers," analysts at ANZ said in a report.

Hedge funds and other large investors raised their bets on rising oil prices last week to the highest level since May, data from the U.S. regulator showed. (Additional reporting by Manash Goswami; editing by Jason Neely)

Energy.