* Brent crude still less than $2 from 32-month high
* West Texas Intermediate (WTI) crude off 31-month peak
* Silver plunges 10 pct, gold drops from record
By Alejandro Barbajosa
SINGAPORE, May 2 (Reuters) - Oil fell on Monday for the first time in four sessions, with U.S. benchmark prices off a 31-month high as NATO air strikes killed one of Libyan leader Muammar Gaddafi's sons and after Saudi Arabia increased production in April.
ICE Brent crude for June
Gaddafi's youngest son and three grandchildren were killed in a NATO air strike, the Libyan government said on Sunday. Britain said that while it was not targeting the leader, it was homing in on the regime's military machine. [ID:nLDE73T0D1]
"What's happening in Libya is probably an event that will see Gaddafi moved out of his position, so the risk premium which relates to Middle East concerns will start to erode," said Jonathan Barratt, managing director at Commodity Broking Services in Sydney, estimating that premium at about $18.
Saudi Arabia's crude oil output edged back up in April to around 8.5 million barrels per day (bpd) from roughly 8.3 million bpd in March as demand picked up, Saudi-based industry sources said on Sunday. [ID:nLDE74005M]
"Saudi Arabia has increased production, we know that the dollar is slightly better bid and you have big movements in the precious metals markets," Barratt said.
The dollar strengthened by nearly 0.3 percent earlier on Monday following last week's slide, deterring investors from piling into commodities this week and triggering a 10 percent plunge in spot silver prices.
Last week's Federal Reserve reassurance that economic stimulus would continue boosted U.S. crude to above $114 on Friday, the highest since September 2008, and gold to a record earlier on Monday.
Money managers increased their bets on higher U.S. crude oil prices to a combined record level in New York and London in the week to April 26, data from the CFTC showed on Friday, as U.S. prices rose to their highest level since September 2008. [ID:nN29293464]
On the New York Mercantile Exchange alone, net-long crude futures and options positions rose by 11,202 to 301,118, the Commodity Futures Trading Commission said on Friday, just shy of an all-time high of 311,632 reached in March. [ID:nEMS4TV36F]
MIDEAST UNREST
Libyan government spokesman Mussa Ibrahim said Gaddafi was unharmed and in good health despite what he called "a direct operation to assassinate the leader of this country" following Sunday's NATO air strikes.
The British and Italian embassies in Tripoli were attacked after Gaddafi loyalists were shown on Libyan television vowing vengeance following the air strike.
A deal to remove Yemeni President Ali Abdullah Saleh looked doomed on Sunday after he refused to sign, raising the threat of more instability in the Arab state. [ID:nLDE74004W]
Security forces arrested hundreds of pro-democracy sympathisers in cities across Syria after taking control of the city of Deraa, cradle of the uprising against President Bashar al-Assad's autocratic rule. [ID:nLDE7400HV]
Volatility and uncertainty due to the pan-Arab protests and Libya's conflict have tempered oil trading. The U.S. 30-day average volume was down by nearly 130,000 lots compared with the 250-day average at the end of last week, Reuters data showed.
A holiday in parts of Asia, Europe and Latin America on Monday was also set to stifle trade. (Editing by Michael Urquhart)