Brent crude fell toward $112 a barrel on Friday as unabated euro zone debt woes and a surprise build in US oil stockpiles tempered gains from fears of supply disruption on mounting tensions between Iran and the West.

Investors are treading cautiously as unresolved debt issues in the euro zone may worsen and drag down major economies, slowing down growth and oil demand. An unexpected 2.2 million barrels rise in US crude stockpiles also weighed on sentiment.

Yet, Brent is set to rise more than 4 percent in the first week of 2012 as Iran threatened to shut the Strait of Hormuz, the world's most important oil route, in retaliation against tighter sanctions from the United States and a possible ban on its crude exports to Europe.

February Brent crude fell 47 cents to $112.27 a barrel by 0306 GMT while US crude was down 39 cents to $101.42.

'Oil could see-saw as the US and Iran play brinkmanship,' said Tony Nunan, a risk manager at Mitsubishi Corp, adding that the global oil demand outlook was murky as the euro zone crisis dragged on.

A risk premium has been built into oil in case of a sudden supply disruption if the Strait of Hormuz is shut although the probability is low, he said.

Iran faced the prospect of cutbacks in its oil sales to China and Japan as new measures to block Tehran's crude exports over its nuclear programme appeared to be driving its economy to the wall.

The European Union could make a final decision on a proposal to ban Iranian oil exports and freeze Iranian central bank assets by the end of January.

'This may force Iran to issue another statement again,' Nunan said.

Growth concerns

Investors are worried the Euro zone situation could worsen, snuff out burgeoning growth in the United States and slow down China's economy -- the world's top oil consumers.

'Demand doesn't look very well as the EU crisis drags on and the US economy is far from being out of the woods,' Nunan said.

Growth momentum in China remained subdued as the second-biggest economy saw overall levels of activity in the services sector mired at three-month lows.

The US will release non-farm payrolls data later on Friday which could be bullish for crude demand if it shows a recovery, Nunan said.Oil could also draw more funds from investors exiting from European investments as the region's debt crisis persists, traders said.

'Plenty of cash reserves have been pulled out from the euro zone and they could possibly move into commodities, especially energy,' said Ryoma Furumi, a commodity sales manager at Newedge Japan.

Brent's trading volume rose 34 per cent against its 30-day average, according to Reuters data. US crude volume was up 11.7 per cent from its 30-day average. – Reuters