US oil rebounded more than a $1 to $98 a barrel on Wednesday, after two straight sessions of declines, as a surprise drop in gasoline stocks allayed concerns about weaker demand ahead of the peak driving season.

Prices were also supported by a softer dollar, but sovereign debt problems in Europe and weak economic data from the US kept investors on the edge.

Brent crude was up 69 cents at $110.68 a barrel by 0255 GMT, after dropping 2.4 percent in the previous session.

US crude gained 86 cents at $97.77 a barrel, after rising to as high as $98.00 earlier.

'It has been a severe correction since two weeks ago after the dollar rebounded and the ECB didn't raise interest rates,' said Tony Nunan, a Tokyo-based risk manager at Mitsubishi Corp.      'Nymex has twice rebounded above $95, maybe the correction has run its course.'

Technical charts indicate short-term bullish targets of $112.50 for Brent and $100 for US oil, according to Wang Tao, a Reuters markets analyst.

US crude stocks rose 2.7 million barrels last week, but gasoline stocks fell 676,000 barrels and distillates dropped 2.8 million barrels, American Petroleum Institute data showed.

A Reuters survey of analysts had forecast US crude inventories would be up for the fourth straight week, but only by 1 million barrels. The poll had also forecast a 800,000 barrels build in gasoline stocks.

The drop in gasoline stocks could signal that demand for the fuel picked up after prices fell last week for the first time in eight weeks, easing from highs of near $4 a gallon in April.

'If DOE data confirms the draw in gasoline, that will be bullish for crude,' Nunan said, adding that supply was not keeping up with demand on lower refinery utilisation rates and as Louisiana refineries had been threatened by flood water from the Mississippi River.

Eight large Louisiana refineries equal to 12 percent of national capacity appear to be at lower risk of flooding after US Army engineers opened a key floodgate over the weekend, Senator Mary Laudrieu said.

The US Energy Information Administration will release its own inventory data on Wednesday at 1430 GMT.

Weaker dollar supports

The US dollar index , a measure of the greenback against a basket of currencies, was down 0.22 percent by 0255 GMT, supporting dollar-denominated commodities. A weaker dollar boosts the purchasing power of holders of other currencies.

Supply worries stemming from geopolitical tensions also continued to support oil prices.

Libya's top oil official defected from Muammar Gaddafi's administration and fled to neighbouring Tunisia, a Tunisian security source said.

'It confirms what most people believe that it's just a matter of time that the Gaddafi regime collapses, but it will be a long time before production comes back,' Nunan said.

But demand worries lingered amid the euro zone's debt crisis and disappointing data from the US.

Europe's top financial officials broke a taboo on Tuesday and acknowledged for the first time that Greece may have to restructure its debt, a move that could stoke Europe's sovereign debt crisis.

In the US, factory output slipped for the first time in 10 months in April, while housing starts and building permits fell, data released on Monday showed. – Reuters