By Jennifer Tan

Also weighing on prices is the worry that Friday's U.S. December non-farm payrolls number could be even worse than the half a million job losses predicted in a Reuters poll, which would be the highest monthly job losses in 34 years.

U.S. crude for February delivery was up 30 cents at $42.00 a barrel by 0800 GMT (3 a.m. EST), after climbing $1.00 to $42.70. London Brent crude was 45 cents higher at $45.12.

Crude had fallen 2.2 percent to settle at $41.70 overnight, after a 12 percent slump on Wednesday, the biggest daily percentage drop in more than seven years.

"At the $40-$42 level, oil is seen as undervalued, so people are now buying back," said Tetsu Emori, a fund manager with Astmax Co Ltd in Tokyo.

"In the short term, weak demand in the U.S. has already been priced in. A lot of people have already sold their long positions, and are looking to buy on dips."

Top crude exporter Saudi Arabia was the latest member of OPEC to show that it is implementing the latest output cut agreement.

It will deepen its supply cuts in February from January to at least three Asian crude buyers, industry sources said on Friday.

Earlier this week, Kuwait and Iran also told customers of bigger supply curbs this month, after the cartel agreed its biggest ever production cut in December in a bid to bolster prices.

One prop of the recent rally that had lifted oil prices since the start of the year looked likely to be removed, after Russia reached an agreement to deploy European Union monitors to ensure the smooth flow of gas via Ukraine.

The threat of widening supply disruptions in Europe from the Russia-Ukraine gas row, as well as Israel's invasion of Gaza, had boosted oil to a one-month high of $50.47 on Tuesday.

Oil has fallen more than $100 from a record peak of over $147 a barrel in July, as the global economic downturn hits demand for fuel. It settled at $33.87 a barrel on December 19, the lowest level since February 10, 2004.

President-elect Barack Obama, who takes office on January 20, has urged U.S. lawmakers to work day and night to pass a massive proposed stimulus package of tax cuts and public-works spending likely to cost $800 billion or more.

Jonathan Kornafel, director of Hudson Capital Energy Asia, said that barring new developments on the geopolitical front, crude was likely to head lower in the near term.

"Any package Obama puts together will not affect consumer energy demand for several months at least, and this may result in a further steepening of the contango," he said.

In the Middle East, Israel pushed ahead with its offensive in Gaza on Friday, ignoring a U.N. Security Council resolution calling for an immediate ceasefire to the 14-day-old conflict. [nL9116659]

While the conflict does not directly threaten oil supplies, Middle East unrest can bolster prices because countries in the region pump about a third of the world's oil.

(Editing by Michael Urquhart)