Crude oil futures slumped on Thursday as the dollar index strengthened on fresh euro zone credit woes, while the focus remained on Libya, where the escalating violence triggered fears that the country's oil infrastructure could suffer long-lasting damage.

Both Brent and U.S. light crude benchmarks fell by more than $2 earlier in the session. By 1340 GMT, Brent futures for April pared back some losses, down $1.40 to $114.54 a barrel.

U.S. crude futures recouped some of the losses by the same time, down $1.47 to $102.91.

Concerns about the eurozone debt crisis have come back to the surface after the downgrade of Spain, Commerzbank analyst Carsten Fritsch said. But I wouldn't expect it to continue, it could be a short- term blip, as the general direction is upwards because of the continued supply risk in Libya and tomorrow's day of rage in Saudi Arabia.

A fall in the euro on the back of Moody's downgrade of Spain's sovereign debt pushed the dollar index <.DXY> higher. A stronger greenback typically renders dollar-denominated commodities such as oil and gold more expensive.

The focus remained on Libya, where tanks fired on rebel positions around the oil port of Ras Lanuf and warplanes hit another oil hub further east on Thursday as Muammar Gaddafi carried counter-attacks deeper into the insurgent heartland.

What we are looking at is possible damages to the oil installations. Up to now we still had the residually optimistic scenario, but if oil installations are being damaged, there is a completely different situation. We may have to restructure everything in the medium term to adapt to a substitute to Libyan oil, Christophe Barret from CA CIB said. It means Libya could remain out of the picture for a long time.

An official from the East Libya oil company AGOCO told Reuters the company was making arrangements to market oil directly to foreign buyers, instead of through its state-owned parent.

The oil port of Brega ran out of crude oil stocks, forcing crude tankers to cancel shipments or travel to Saudi Arabia, a source told Reuters. Libya turned away an oil tanker hired by Chinese oil trading firm Unipec to lift 2.0 million barrels of Es Sider crude, a trading source said Thursday.

The large explosions and enormous columns of smoke from storage tanks and other facilities in Ras Lanuf, close to the Es Sider terminal, are perhaps more than merely symbolic, Barclays Capital oil analysts headed by Paul Horsnell said.

They represent a final fading of any residual realistic hope that the outage of Libyan oil could prove to be anything other than prolonged.

PRESSURE MOUNTS ON LIBYA

International pressure continues to mount after Russia said it would ban all weapons sales to Libya, while Germany ordered a freeze on bank accounts held by the Libyan central bank and the Libyan Investment Authority.

Confirming previous non-Libyan estimates, Shokri Ghanem, chairman of Libya's National Oil Corp, said production had been cut to about half a million barrels per day from 1.6 million bpd by the war, as many foreign and local workers had left oilfields.

Libyan oil trade has been paralyzed as banks decline to clear payments in dollars due to U.S. sanctions, though Austrian energy group OMV said it had been buying small amounts of Libyan crude oil and would continue to do so.

It appears that most of Libya's bridges with OECD countries in particular are already aflame or may have already been burned, Barclays Capital said.

One can now easily imagine circumstances in which Libya's previously very short-haul exports of crude oil become very long-haul indeed.

Saudi Arabia has increased production to 9 million bpd, almost 1 million bpd above its OPEC target. The kingdom says it holds spare capacity of 3.5 million bpd. Still, an OPEC delegate said on Wednesday the group saw no need for an emergency meeting to discuss raising output.

On Wednesday, U.S. light crude fell after stockpiles at the pricing point for benchmark West Texas Intermediate at Cushing, Oklahoma, surged 1.7 million barrels to a record of almost 40.3 million barrels, according to the U.S. Energy Information Administration.

That caused the discount of WTI to European marker Brent to widen, trading at $11.49 a barrel by 1315 GMT.

Total U.S. crude inventories rose 2.5 million barrels last week, the EIA said, dwarfing the forecast for an increase of just 400,000 barrels in a Reuters poll. The weekly inventory data also showed drawdowns for gasoline and distillates were bigger than expected, reflecting improving demand.

(Additional reporting by Alejandro Barbajosa in Singapore; editing by James Jukwey)