* Oil rises above $77 a barrel on hopes over economy
* Expectations of strong demand boost sentiment
* Stocks rally, weaker dollar offer support
By Seng Li Peng
SINGAPORE, Feb 17 (Reuters) - Oil edged up above $77 a barrel on Wednesday, supported by the weaker dollar and rally in equities markets, as optimism over the global economy stoked hopes for higher fuel demand.
Asian stock markets, led by Japan and Hong Kong, extended their rise after U.S. shares posted their biggest daily percentage gain in three months on Tuesday, signalling a return of risk appetite among investors.
U.S. crude for March delivery rose 26 cents to $77.27 a barrel at 0353 GMT, marked by thin trading volumes, after closing 3.9 percent higher on Tuesday, the highest percentage gain since the 5.8 percent rise on Sept. 30.
London ICE Brent for April climbed 22 cents to $75.90 a barrel.
"The market is purely focused on expectations of an economic recovery rather than on inventories," said Jonathan Barratt, managing director of Commodities Broking Services in Sydney. "The inventory build-up will in itself help contain the prices. But people feel that demand will continue to rise."
Trade was still muted in most parts of Asia as traders slowly returned from holidays.
"I expect things to really pick up when China returns from their holiday. As a result, people are starting to preempt that," Barratt said.
"I wouldn't be surprised that oil will be at $80.00 a barrel by the weekend."
Crude oil inventories in the United States were expected to have risen by 1.9 million barrels in the week ended Feb. 12, as imports that had been delayed by weather along the Gulf Coast came ashore, an initial Reuters found.
Distillate stocks, which include heating oil and diesel, fell 1.6 million barrels, with demand for heating oil seen higher after two heavy snowstorms hit the U.S. East Coast, while gasoline supplies rose 1.6 million barrels, the poll showed.
The report from industry group American Petroleum Institute (API) will be released at 2130 GMT on Wednesday -- delayed by a day this week due to Monday's federal Presidents' Day holiday -- while the the Energy Information Administration's (EIA) data is due at 1600 GMT on Thursday.
STOCK MARKET BOOST
Expectations of economic recovery saw Asian shares jump on the back of strong financial and resource stocks, as Hong Kong and Chinese investores shrugged off China's latest move to temper robust lending.
Oil was also hoisted by the softer dollar, which fell 1.3 percent versus the euro late on Tuesday. The euro held on to gains at $1.3750 on Wednesday, as investors cut short positions on views that its fall over Greece's debt problems had run its course.
Traders also said the buying interest for distillates, which have been slow since last April, has started to show signs of improvement. Global distillate stocks, although still heavy, are at gradually drawn down.
Ongoing tensions between the U.S. and Iran may continue to support prices, as President Mahmoud Ahmadinejad had said that any country that tried to impose new sanctions on Iran would regret its actions, as the U.S. and Russia voiced concerns about Tehran's nuclear programme. (Editing by Ramthan Hussain)