* Brent crude steadies around $107.50/bbl
* U.S. crude falls to $85.23/bbl, lowest since February
* U.S. may be headed for double-dip recession -fund manager
* Coming Up: U.S. non-farm payrolls for July; 1230 GMT
By Alejandro Barbajosa
SINGAPORE, Aug 5 (Reuters) - U.S. crude extended losses on Friday to below $86, heading for its biggest weekly drop since early May, after fears of a global economic slowdown drove investors to the exits in a commodities sell-off that has wiped out oil's gains in 2011.
Brent has dropped by nearly 9 percent and U.S. crude by about 10 percent this week. Fears of the U.S. sliding back toward recession after disappointing economic indicators and Europe's escalating debt crisis reignited concerns of a slowdown in oil consumption. Traders now await July nonfarm payrolls, which may increase by 85,000, after rising 18,000 in June.
U.S. crude
"The U.S. economy appears headed for a double dip recession," said Monty Guild, chief executive officer of Guild Investment Management. "Even though we expect weak economic activity will lead to more money printing from central banks, the markets are going through a rugged period which makes us want to reduce our exposure."
Guild recommended oil investors to take profits.
Commodities continued their slide, extending Thursday's rout triggered by a global stampede away from riskier assets. Asian stocks tumbled as much as 5 percent after the worst sell-off on Wall Street since the global financial crisis.
Barclays Capital, one of the most bullish forecasters of oil prices this year, now sees slower global demand growth this year. In a report to be published in the next few days, Barclays Capital now sees global oil demand increasing by 1.1 million barrels per day (bpd) this year to 88.68 million bpd, to reflect the dramatic economic slowdown.
The investment bank previously forecast a rise in oil demand this year of 1.56 million bpd and two months ago expected the increase to be as much as 1.7 million. The sharp reduction would take it from one of the most bullish on growth to one of the most bearish, according to a Reuters poll two months ago.
The European Central Bank resumed buying government bonds after a four-month break and announced new longer-term funding for liquidity-starved banks. But after a brief hiccup, Italian and Spanish bond yields continued their inexorable climb towards danger levels.
U.S. weekly jobless claims on Thursday suggested a marginal improvement in the labor market, following disappointing manufacturing and consumer spending data earlier this week.
DEMAND OUTLOOK
U.S. gasoline futures led Thursday's slump, with their premium over U.S. crude falling to the lowest in a month after stockpile data added to evidence that expensive fuel and a weak economy have reduced demand in the world's top user.
As crude oil broke below its weeks-long trading range, implied volatility in the options market spiked to the highest since the May 5 melt-down. The so-called Oil VIX index based on NYMEX options surged more than 26 percent. (Volatility chart: http://r.reuters.com/zar92s)
In commodities, the 19-commodity Reuters-Jefferies index , a global benchmark for the asset class, fell 2.8 percent on Thursday, its biggest one-day decline since May 11. (Editing by Manash Goswami)