By Emma Farge LONDON (Reuters) - U.S. crude futures fell more than $1 toward $78 a barrel on Thursday as gains in the dollar weighed on prices and doubts about the pace of demand recovery in the United States dampened sentiment. The dollar inched higher against the euro to move up from 15-month lows earlier in the week while sluggish demand for distillates due to mild weather in the United States also steered prices lower. Oil extended losses after a 2 percent drop in U.S. stocks, signaling to the market that the expected recovery in fuel demand in the world's largest consumer could falter. U.S. crude prices for December delivery fell $1.43 to $78.15 a barrel by 1503 GMT, after settling up 44 cents on Wednesday. Brent crude for January delivery fell $1.20 to $79.27 a barrel after trading on Wednesday within cents of the year high of $80.26 reached in October. "We have seen some good gains in the last few days and we are very close to important psychological levels so it's a slight retracement," said oil futures broker Tony Machacek at Bache Financial. U.S. oil prices rose above the key $80 a barrel level in the previous session after government data showed a drop in both crude and product inventories in the world's largest oil consumer. Crude stocks fell a more-than-expected 900,000 barrels and while distillate stocks including diesel and heating oil fell 300,000 barrels this was less than analyst projections. FLOATING STOCKS But analysts said mild weather in the United States and high global oil products stocks held in storage on land and on floating vessels was set to limit potential upside in oil. Floating stocks of oil products, mostly distillates, are set to rise to over 97 million barrels by the end of the year, according to Reuters estimates. "Temperatures are unseasonably mild in the United States and crude is holding the range between the high $70s and low $80s," said Peter McGuire, managing director of CWA Global Markets. On the supply side, the Organization of the Petroleum Exporting Countries should hold oil output steady when it meets in December as current prices do not suggest the need to change supply, the head of Libya's National Oil Corporation said on Wednesday. Oil prices have rallied from lows of around $33 a barrel last December as investors have used liquidity pumped out by central banks to take bets on the pace of fuel demand recovery and gains in the oil market. A depreciating dollar has also lured investors who are looking to use tangible assets such as oil as a hedge. "Oil is very close to other assets and moves will depend on the dollar," said Machacek. Since hitting a high of $82 a barrel in October, U.S. prices have traded in a narrow $7 band. Implied oil volatility is the lowest since February 2008, back near levels before last year's surge to a record high. For a graphic showing oil prices and implied volatility, click: here The market shrugged off news that the number of additional U.S. workers claiming unemployment benefits was unchanged at 505,000 in the week ending November 14.

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