UPDATE 4-Oil falls to three-week low towards $114

* Federal Reserve may slow or halt bond buying -minutes

* Coming Up: EIA weekly oil inventories; 1600 GMT (Adds quotes, price support levels)

By Alex Lawler

LONDON, Feb 21 (Reuters) - Oil fell to a three-week low towards $114 a barrel on Thursday on concern the U.S. Federal Reserve might end its stimulus programme sooner than thought and on the prospect of a rise in Saudi Arabian output.

The drop extended Brent crude's largest one-day drop in 2013 on Wednesday, alongside declines in other commodities and equities. Rumours that a hedge fund was liquidating positions also had helped pressure prices, although there was no evidence of liquidation by any specific fund.

Brent crude fell as low as $114.30, the lowest intra-day price since Jan. 31, and as of 1022 GMT was down 92 cents at $114.68 a barrel. U.S. crude slipped $1.06 to $94.16.

"We have reached a price level where demand destruction is to be expected and government intervention feared," said Olivier Jakob, an analyst at Petromatrix. "Brent had been losing its positive momentum, and yesterday's move is an acceleration of that."

Since mid-December, hedge funds and other large speculators have nearly doubled their bets that oil prices will rise, amassing positions in Brent and U.S. crude futures and options equivalent to around 440 million barrels of oil, regulatory and exchange data show.

The price of Brent rose by $10 a barrel in the first six weeks of 2013 to hit a nine-month high above $119 on Feb. 8 as signs of strong demand from China and lower Saudi supply raised expectations of a tighter market.

"Brent was overbought amid overwhelming investor interest, an increased geopolitical premium and bullish macro sentiment, while short-term fundamentals simply do not justify sustained gains past $120," said Andrey Kryuchenkov, an analyst at VTB Capital in London.

A key level of technical support for Brent on Thursday was around $113.10, the 50-day moving average and the lower Bollinger band, Jakob said. A move below this could lead to more sell orders.

On Wednesday, minutes of the Federal Reserve's last policy meeting cast doubt over how much longer the U.S. central bank would stick to its stimulus plan, leading to declines in the euro, equities and commodities.

On Tuesday oil industry sources said the world's top oil exporter, Saudi Arabia, which cut supplies in the last two months of 2012, could raise its output in the second quarter to satisfy higher demand.

Also weighing on oil, a report from the American Petroleum Institute on Wednesday said crude stocks rose by a more-than-forecast 3 million barrels. The U.S. government's weekly supply report is due later on Thursday.

Investors were also weighing the prospect of reduced tension between Iran and the West over Tehran's nuclear work. A Western diplomat said on Wednesday major powers are ready to make "a substantial and serious offer" to Iran during talks next week. (Reporting by Alex Lawler, Clarence Fernandez, Muralikumar Anantharaman and Tom Hogue; editing by Jason Neely and Jane Baird)