* Gaza militants, Israel agree to ceasefire - Hamas official
* Israel and Egypt say no deal yet
* Coming Up: API U.S. oil inventory data (Updates with API data, Gaza truce delayed)
By Matthew Robinson
NEW YORK, Nov 20 (Reuters) - Oil fell from a one-month high on Tuesday amid signs of a ceasefire that would end a week of rocket attacks and air strikes between Palestinians and Israelis.
But losses were pared late in the session after initial reports of an overnight truce proved premature, and weekly U.S. oil data showed a surprisingly deep drop in gasoline and heating fuel supplies.
Benchmark New York gasoline futures that had fallen more than 2 percent during the day recouped nearly all those losses after the end of open-outcry trading.
Oil prices had fallen at midday after Gaza's rulers, the Palestinian Islamist movement Hamas, said that a truce would start overnight, easing jitters among traders who had feared intensifying violence could eventually draw in regional oil superpowers who supply a third of the world's crude.
"Yesterday's big rally was all about fears of a wider conflict stemming from Israel and Gaza, so when the truce was announced it's not surprising we've seen prices come right off," said Andy Lebow, vice president at Jefferies Bache in New York.
Late on Tuesday a Hamas official said the organization did not expect a formal ceasefire announcement until Wednesday as Hamas was still waiting for an Israeli response to proposals. Israeli officials continued to say that discussions were continuing.
Meanwhile Israel pressed on with its strikes in the coastal enclave on the seventh day of its offensive and Palestinian rockets still flashed across the border as U.S. Secretary of State Hillary Clinton arrived in Jerusalem. She was due to meet Netanyahu around 11 p.m. (2100 GMT).
Brent crude fell $1.87, or 1.7 percent, to close at $109.83 a barrel, recoiling from the 200-day moving average at around $111.80 a barrel. By 5:15 p.m. EST it had rebounded by 60 cents, trading at $110.46 a barrel.
U.S. crude oil futures fell 2.8 percent, or $2.53 a barrel, to settle at $86.75. U.S. stock markets were little changed, while commodities mostly dipped.
American Petroleum Institute data released on Tuesday showed U.S. crude oil inventories fell more than 1.9 million barrels in the week to Nov. 16, after analysts polled by Reuters had forecast a build of 900,000 barrels.
But the bigger surprise was in refined fuel stocks, with U.S. gasoline inventories falling by 4.8 million barrels, compared with expectations for a 1 million-barrel build. Distillate inventories fell by a total of 4.4 million barrels, API reported, three times more than forecast.
Concern about Europe's economy also put pressure on prices of oil and other commodities after ratings agency Moody's stripped France of its prized triple-A badge because of an uncertain fiscal and economic outlook.
While word of a ceasefire helped pull down prices, Israel pressed on with its strikes in Gaza on the seventh day of its offensive.
Oil markets have been balancing export problems in the North Sea and the risk of supply disruptions in the Middle East against the struggling economy and its impact on fuel demand.
Efforts by U.S. lawmakers to try to reach a budget deal to avoid a fiscal crisis have also grabbed the attention of traders across equity and commodity markets over the past week, with Federal Reserve Chairman Ben Bernanke adding to anxiety in comments before the Economic Club of New York.
"The ability of the Fed to offset headwinds is not infinite," he said. He predicted a "very good year" for the U.S. economy if politicians can reach a debt deal, but added: "In the worst-case scenario where the economy goes off the broad fiscal cliff ... I don't think the Fed has the tools to offset that." (Reporting by Matthew Robinson, David Sheppard and Jonathan Leff in New York; Peg Mackey in London and Jessica Jaganathan in Singapore; Editing by Grant McCool, David Gregorio, Bob Burgdorfer and Jim Marshall)