* Extends Brent's largest one-day drop of 2013 on Wednesday
* Federal Reserve may slow or halt bond buying -minutes
* Coming Up: EIA weekly oil inventories; 1600 GMT (Updates prices, adds quote in paragraph 4)
By Alex Lawler
LONDON, Feb 21 (Reuters) - Oil fell to a three-week low towards $114 a barrel on Thursday on concern the U.S. Federal Reserve might end its stimulus programme sooner than thought and on the prospect of a rise in Saudi Arabian output.
The drop extended Brent crude's largest one-day drop in 2013 on Wednesday, alongside declines in other commodities and equities. Rumours that a hedge fund was liquidating positions also had helped pressure prices, although there was no evidence of liquidation by any specific fund.
Brent crude fell as low as $114.12, the lowest intra-day price since Jan. 30, and as of 1142 GMT was down $1.28 at $114.32 a barrel. U.S. crude also slipped by $1.28 to $93.94.
"Yesterday was a major sell-off, not just in oil but in other commodities," said Tony Machacek, a broker at Jefferies Bache in London. "We've come off a long way, and just looking at the charts, Brent could come down to the $113 area."
Since mid-December, hedge funds and other large speculators have nearly doubled their bets that oil prices will rise, amassing positions in Brent and U.S. crude futures and options equivalent to around 440 million barrels of oil, regulatory and exchange data show.
The price of Brent rose by $10 a barrel in the first six weeks of 2013 to hit a nine-month high above $119 on Feb. 8 as signs of strong demand from China and lower Saudi supply raised expectations of a tighter market.
"Brent was overbought amid overwhelming investor interest, an increased geopolitical premium and bullish macro sentiment, while short-term fundamentals simply do not justify sustained gains past $120," said Andrey Kryuchenkov, an analyst at VTB Capital in London.
A key level of technical support for Brent on Thursday was around $113.10, the 50-day moving average and the lower Bollinger band, said Olivier Jakob, an analyst at Petromatrix. A move below this could lead to more sell orders.
On Wednesday, minutes of the Federal Reserve's last policy meeting cast doubt over how much longer the U.S. central bank would stick to its stimulus plan, leading to declines in the euro, equities and commodities.
On Tuesday oil industry sources said top world oil exporter Saudi Arabia, which cut supplies in the last two months of 2012, could raise its output in the second quarter to satisfy higher demand.
Also weighing on oil, a report from the American Petroleum Institute on Wednesday said crude stocks rose by a more-than-forecast 3 million barrels. The U.S. government's weekly supply report is due later on Thursday.
Investors were also weighing the prospect of reduced tension between Iran and the West over Tehran's nuclear work. A Western diplomat said on Wednesday major powers are ready to make "a substantial and serious offer" to Iran during talks next week. (Additional reporting by Florence Tan in Singapore; editing by Jason Neely and Jane Baird)
