UPDATE 7-US oil slumps on economy, drops 8.9 pct in Aug

                                
 * U.S. crude prices end Aug down 8.9 pct for the month
                                
 * U.S. crude inventories expected to have risen last week
                                
 * Coming up: EIA oil data on Wednesday, 10:30 a.m. EDT
 (Recasts, updates with settlement prices, market activity)
                                
 By Robert Gibbons
                                
 NEW YORK, Aug 31 (Reuters) - U.S. crude prices fell sharply
on Tuesday, slumping a second straight day and posting the
first monthly decline since May as concerns about faltering
economic growth, weak demand and bulging oil inventories
pressured crude and gasoline futures.
                                
 The expectation that Hurricane Earl will brush the U.S.
East Coast and squelch gasoline demand during the approaching
Labor Day holiday weekend added to the bearish sentiment.
                                
 U.S. October crude <CLc1> fell $2.78, or 3.72 percent, to
settle at $71.92 a barrel, trading as high as $74.73 and
slumping as low as $71.53 in post-settlement trading.
                                
 For the month, U.S. crude ended down $7.03 a barrel, or 8.9
percent, the biggest monthly percentage loss since May, when
oil prices hit a 2010 low of $64.24 on May 20, the weakest
front-month price since July 2009, after reaching the 2010 peak
of $87.15 on May 3.
                                
 On Tuesday, October Brent <LCOc1> crude dropped $1.96 to
settle at $74.64 a barrel.
                                
 "End-of-the-month volatility has pulled down crude futures
today, with the expiration of refined product futures adding
pressure," said Mark Waggoner, president at Excel Futures in
Bend, Oregon.
                                
 The market was awaiting weekly oil inventory data from the
American Petroleum Institute due at 4:30 p.m. EDT (2030 GMT) on
Tuesday. Analysts in an expanded Reuters poll on Tuesday
expected a 1.1 million-barrel gain in crude stocks in the week
to Aug. 27. [EIA/S]
                                
 Adding to the bearish sentiment was a report from the
Institute for Supply Management-Chicago that showed business
activity in the U.S. Midwest slowed in August. [ID:nN31183001]
                                
 STORM WATCH
                                
 While no U.S. landfall had been projected for Hurricane
Earl, authorities voiced concern about a possible "close
approach" to the North Carolina coast. [ID:nN31228995]
                                
 In addition to Earl, the U.S. National Hurricane Center was
monitoring two other tropical systems in the Atlantic basin. So
far, computer models showed no immediate threat to energy
infrastructure in the Gulf of Mexico region. [ID:nN31225820]
                                
 "Earl being expected to brush the East Coast pushed oil
down today because it may wipe out the expected Labor Day
demand. And the MasterCard (gasoline) demand data reinforced
the weak demand scenario," said Phil Flynn, analyst at PFGBest
Research in Chicago.
                                
 The U.S. Labor Day holiday on Monday is the traditional end
of the summer driving season and MasterCard said on Tuesday
that U.S. weekly retail gasoline demand fell 3.1 percent last
week from the previous week and managed only a 0.7 percent rise
versus the year-ago period. [ID:nN31257975]
                                
 Expiring U.S. September gasoline <RBU0> fell 4.47 cents to
settle at $1.8894 a gallon. September heating oil <HOU0> also
went off the board, dropping 3.08 cents to $1.9944 a gallon.
                                
 The outlook for the U.S. economy would have to deteriorate
"appreciably" to spur fresh support from the Federal Reserve,
minutes of the central bank's last policy meeting released on
Tuesday said. [ID:nN31253959]
                                
 Traders noted that oil markets were already in a cautious
mood ahead of Friday's August U.S. nonfarm payrolls report.
                                
 "The Fed is clearly concerned about the state of the
recovery, if there still is one, and is looking for effective
constructive measures," said John Kilduff, partner at Again
Capital LLC in New York.
                                
 Crude failed to get a boost from the weak dollar, which
remained pressured against the yen and the euro after the Fed
minutes release. [USD/] The dollar index <.DXY> also weakened.
                                
 A weak dollar can boost oil prices because it makes
dollar-denominated oil cheaper for buyers using other
currencies.
                                
 U.S. stocks seesawed before ending mixed, with the S&P 500
and Dow industrials ending up slightly, while Nasdaq indexes
slipped. Stocks had been supported intraday by consumer
confidence and home price reports helped soothe some investor
anxiety about the strength of the economy. [.N]
 (Additional reporting by Gene Ramos in New York, Alex Lawler
in London, Florence Tan; Editing by Lisa Shumaker)