UPDATE 7-Oil dips 2 pct on China fears, US stockpiles

* China growth positive, sparks inflation worries

* U.S. crude stockpiles unexpectedly rise

* Bearish sentiment outweighs U.S. jobs, housing data

* Coming up: CFTC traders' data, 3:30 p.m. EST, Friday

(Recasts, updates prices, market activity to settlement)

By Gene Ramos

NEW YORK, Jan 20 (Reuters) - Oil prices slumped about 2 percent on Thursday on a sell-off sparked by an unexpected rise in U.S. crude stockpiles and worries that China might tighten monetary policy to fight inflation.

The steep drop in prices came as investors liquidated positions on the front-month U.S. February crude contract <CLG1>, which expired at the close, overshadowng upbeat U.S. economic data on jobs and housing.

Crude oil fell along with a sell-off in a broad array of commodities and equities. The slide followed a report by China that its economy grew 9.8 percent in the fourth quarter, even faster than expected, while inflation barely slowed.

This raised fears the government will tighten monetary policy to choke off excessive demand. [ID:nN20126733]

Crude oil and other other commodities also came under pressure from a rising dollar after U.S. economic data fueled hope that the country's economic recovery was on track.

In late trading the dollar edged up 0.22 percent against a basket of currencies, a drag on commodities priced in the greenback. <.DXY> [USD/]

U.S. February crude settled $2 lower at $88.86 a barrel, down for a third day in a row, after having hit a session low of $88 earlier, the lowest since Jan. 7. U.S. March crude <CLH1> closed down $2.22 at $89.59.

In London, March Brent crude <LCOH1> ended down $1.58 at $96.58 a barrel, falling for the first time in three days, with the session low hitting $95.43, the lowest since Jan. 11.

Brent's premium against U.S. benchmark crude West Texas Intermediate rose to $6.99 at the close, from $6.35 on Wednesday. The premium widened to $7.39 on Thursday, moving towards $8.24 hit on Jan. 14, which was the widest since February 2009.

UNEXPECTED RISE IN U.S. STOCKPILES

U.S. crude oil stockpiles rose 2.62 million barrels in the week to Jan. 14, defying forecasts for a 400,000 barrel drawdown, data from the U.S. Energy Information Administration showed. [EIA/S]

The first stock build in seven weeks jolted investors who had expected inventories to be down significantly due to the disruption of domestic production after the shutdown of the Trans Alaska Pipeline that moves oil from Alaska to the West Coast.

"The Alaska pipeline was not down long enough to have a drastic impact on the crude supplies," said Bill O'Grady, chief investment strategist at Confluence Investment Management in St. Louis, Missouri.

The pipeline, which normally moves 12 percent of U.S. crude production, was back in operation on Monday as producers also restarted, after a bypass repair to circumvent a leak discovered Jan. 8. It was expected to ramp up to normal rates of about 630,000 barrels per day by early next week.

CHINA'S GROWTH MAY SPAWN CURBS

China's fourth quarter gross domestic product rose above forecasts, raising worries that booming growth may lead to inflation. Investors are worried that any steps by China to slow growth may result in a hard landing for markets in 2011.

But not everyone is convinced Chinese attempts to curb inflation will result in lower oil prices.

"We wonder if the increasing inflationary pressure in China can be curbed. At present, China is the world's fastest growing economy and even if the government is trying to curb the inflation, we doubt that it will succeed fully," said the research team at Global Risk Management in a report.

U.S. initial jobless claims fell more than expected last week and showed their biggest decline since February, erasing a holiday-related spike to show a trend toward a healthier labor market remained intact. [ID:nN19241129]

U.S. homes resales jumped more than expected in December, offering some hope of further recovery in the housing sector. [ID:nN20105802] (Additional reporting by Jessica Donati in London; Jeffrey Kerr in New York; Florence Tan in Singapore; editing by Marguerita Choy and David Gregorio)