(Updates prices, adds quote)
* Unexpected increase in crude stocks weighs on U.S. oil
* U.S. debt battle hurts riskier assets
* Brent neutral in $115-$120/bbl range -technicals
* Coming up: EIA inventory data
By Simon Falush
LONDON, July 27 (Reuters) - Oil fell on Wednesday as partisan wrangling over the U.S. debt limit unnerved investors and sent them fleeing from assets perceived to be dependent on growth.
Brent
"The main factor is the debt situation (in the United States), there are fears about growth and the country's AAA rating is under threat," Michael Hewson, analyst at CMC Markets said.
A Republican plan to cut the U.S. deficit faced delay and stiff opposition on Wednesday, piling anxiety onto investors and ordinary Americans hoping for a late compromise to avoid a crippling debt default.
Analysts polled by Reuters expect the U.S. will probably lose its top-notch AAA credit rating from at least one major rating agency, believing the wrangling over the debt ceiling has already damaged the economy.
Bank of Japan board member Hidetoshi Kamezaki said that global growth is slowing and there is uncertainty about its outlook as emerging nations battle rising costs and the debt crisis in the U.S. and Europe threaten to derail recovery.
An unexpected rise in crude oil inventories also weighed on prices as data from oil industry group American Petroleum Institute showed weekly refinery operations fell.
Crude stocks rose by 4 million barrels confounding analysts' expectations for a 1.7 million-barrel draw in a Reuters poll.
Analysts said this pointed to further potential weakness for crude as it is often a pointer for data for the more closely followed U.S. Energy Information Administration, which is due out at 1430 GMT.
"Over the past 12 months, there have been only 15 weeks in which API and DoE data pointed in different directions," Commerzbank said in a note.
"This means that, contrary to market expectations and for the first time in nine weeks, the official DoE figures might also show an increase in stock levels."
U.S. crude oil inventories were forecast down for the eighth straight time last week as imports leveled off, an expanded Reuters poll showed on Tuesday ahead of weekly inventory data.
Eleven of the 12 analysts polled expect a crude stockpile raw for the week to July 22, with the average forecast coming in at 1.7 million barrels on average,
UNCERTAINTY UNNERVES
Deeply divided Republican and Democratic leaders in the U.S. are scrambling to find common ground with less than a week before the government hits its borrowing limit approved by Congress, triggering a possible default that would roil global markets.
"Until the path to global economic growth is ascertained, it will be difficult for oil markets to focus on much else, Barclays Capital said in a report. "After all, economic growth is one of the biggest drivers of oil prices."
Sovereign debt will remain a key factor capping the upside in prices in the immediate future, the report said.
Debt problems in Europe, notably in Italy and Greece, while not the main focus of investor concern on Wednesday, were also keeping investors wary of risky assets, analysts said.
The dollar sank to a three-month low against a basket of major currencies on Wednesday, though it subsequently recovered slightly.
A weak dollar can support dollar-denominated oil by making it less expensive for consumers using other currencies and by luring yield-hungry investors to commodities markets.
Still, most analysts expect the debt ceiling issue to be resolved before the deadline and oil prices to be supported by reduced output amid growing demand from China, India and other emerging nations.
Libya being away from the oil market has already reduced OPEC's spare capacity, and concerns of disruptions from other countries will boost prices for the rest of the year, analysts said. (Additional reporting by Manash Goswami in Singapore; Editing by Alison Birrane)