Brent slips to $118 on euro zone worries

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SINGAPORE (Reuters) - Brent crude slipped to $118 on Tuesday, continuing its steep decline from the previous session, as Spain's debt woes reignited demand growth concerns and threatened to derail the global economic outlook.

Investors remained cautious as Spanish government bond yields broke through the 6 percent mark on Monday for the first time since December, stoking fears that the euro zone's fourth largest economy may need an international bailout.

Brent crude for June delivery fell 51 cents to $118.17 a barrel by 00:35 a.m. Eastern Time, after sliding 2.59 percent in the previous session, the biggest one-day percentage loss since December.

U.S. crude for May delivery which expires on Friday, slipped one cent to $102.92 a barrel, after trading at a high of $103.23 earlier in the day.

"Euro zone concerns are affecting all risk assets at the moment, with the bearish zone suggesting that Greece was just the side show and Spain's the real game," said Ben Le Brun, market analyst at OptionsXpress.

"Elsewhere the economic data is positive, but if something falls over in Spain and Italy, they're too big to fail and too big to bail and will likely create a domino effect."

Spain will see its borrowing costs leap when it sells short-term debt later on Tuesday, with an auction of 12- and 18-month Treasury bills, to test market nerves.

Further adding to investor worries on the crisis, Rome is set to lower the forecast for 2012 output, which predicts a 0.4 percent contraction for the euro zone's third-biggest economy.

POSITIVE US DATA

U.S. crude futures traded higher on stronger-than-expected spending by Americans in March, suggesting economic growth in the first quarter in the country was probably not as weak as many had feared.

Retail sales increased 0.8 percent, beating economists' expectations of a 0.3 percent rise, after rising 1.0 percent in February, the Commerce Department said on Monday.

U.S. crude prices were also supported by news that a major pipeline reversal that will alleviate a large U.S. bottleneck may start ahead of schedule.

Pipeline owners Enterprise Product Partners (EPD.N) and Enbridge (ENB.TO) plan to advance the reversal of the flow of the pipeline by mid-May, pending regulatory approval, about two weeks ahead of schedule.

The reversal would help ease the glut in U.S. crude stockpiles in the Midwest as the pipeline will bring Canadian oil and North Dakota crude directly to the U.S. Gulf Coast.

Brent's premium against U.S. crude benchmark West Texas Intermediate (WTI), narrowed by 47 cents to $14.84 a barrel, after crashing to its lowest level since February in the previous session.

IRAN CONCERNS LINGER

Concerns on the Iran situation lingered in the oil market after U.S. Secretary of State Hilary Clinton said on Monday that sanctions and other pressures will be maintained on Tehran.

Iran's foreign minister was quoted earlier as saying his country was ready to resolve all nuclear issues in the next round of talks with world powers if the West starts lifting sanctions.

Signs of continued talks between western powers and Iran could reduce demand for precautionary inventory building and may take some of the incremental pressure away from the spot oil market, JP Morgan analysts wrote in a note late on Monday.

"However, this should prove a temporary lull -- and a possible opportunity -- as the full imposition of sanctions in July coincides with the seasonal uptick in oil demand, implying a tightening in crude balances in months ahead," they said.

Also fuelling bearish sentiments in the Middle East, Iraq's oil exports are surging this month to record rates that are expected to be sustained for the rest of the year, industry sources said, as Baghdad's multi-billion dollar oil development ramps up a notch.

Iraq is expected to provide the world's largest expansion in oil export capacity in 2012 as new outlets open. Analysts said the extra flows, if they continue, could keep a lid on prices, which are trading near $120 a barrel.

(Editing by Sugita Katyal)

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