Oil prices ended at 2-1/2-year highs on Thursday as supply worries tied to fighting in Libya and Middle East turmoil overshadowed demand concerns spurred by a boost in euro zone interest rates and as a major aftershock struck Japan.

Brent crude for May delivery rose for a sixth day, settling 37 cents higher at $122.67 a barrel, the highest since August 4, 2008.

U.S. May crude futures closed up $1.47 at $110.30 a barrel, the best since September 22, 2008, gaining for the fifth day in six sessions.

Brent's premium against U.S. crude, also known as West Texas Intermediate (WTI), narrowed to $12.37 at the close, after ending at $13.47 on Wednesday.

Trading volumes remained lean. In London, Brent crude volume was 396,378 lots, 17 percent below the 30-day average at 3:10 p.m. EDT. In New York, U.S. crude volume hit 585,932, 9 percent below the 30-day average, with two hours left for trading.

U.S. crude rose after U.S. data showed claims for unemployment benefits fell, adding to signs of a strengthening labor market.

A major aftershock struck northeast Japan on Thursday. The latest quake added to concerns that oil demand would dip in Japan, the world's third largest economy that is already reeling from devastation caused by last month's quake and tsunami.

Analysts agreed that despite earlier divergence in Brent and U.S. crude prices, the market's upward momentum was intact as uncertainties in Libya and the Middle East continued to add to geopolitical risks.

Also of concern, OPEC member Nigeria postponed elections again in some areas, though polls will go ahead in most of the country on Saturday.

DEMAND WORRIES

As expected, the European Central Bank (ECB) lifted interest rates for the first time since the 2008 financial crisis and signaled readiness to tighten further if needed.

Dealers said markets may wobble as other central banks remove easy-money policies.

At current crude oil prices, the risk is turning more and more to the amount of potential demand destruction,' Petromatrix analyst Olivier Jakob said.

Investors also cited worries over high euro zone debt levels and inflation as Portugal asked for an European Union bailout. A rise in euro zone rates would push up the cost of debt for countries already highly indebted.

Products futures are high enough that too much more and it could trigger some demand destruction, especially for gasoline, with supplies pretty ample in the U.S. But the Middle East and Libya keep the uncertainty in the market, said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.

Oil prices earlier slipped from recent 2-1/2-year highs, even after rebels said Muammar Gaddafi's forces damaged a pipeline connecting oilfields to the port town of Marsa el Hariga. Analysts noting supply disruptions are already priced in.

Prices are unsustainable at current levels in the absence of other disruptions, said VTB Capital analyst Andrey Kruychenkov.

We can't possibly justify a further sustained boost to prices unless unrest erupts in an oil-producing country other than Libya with serious threats to crude supplies, Kryuchenkov said.

(Additional reporting by Robert Gibbons and Ed Mcallister in New York; Zaida Espana in London; Florence Tan in Singapore; editing by David Gregorio and Jeffrey Benkoe)

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