* U.S. gasoline stocks spike, largest build since 1993
* China Dec services sector expands at slowest pace in 17 mths (Adds details on U.S. oil inventory report, market comment, updates prices; Changes dateline from LONDON)
By Catherine Ngai
NEW YORK, Jan 6 (Reuters) - Crude oil prices were more than 5 percent lower on Wednesday after tumbling below $35 per barrel for the first time since 2004, as a sharp rise in U.S. gasoline stocks reinforced a bleak picture that the market was awash with plenty of oil.
U.S. government data showing an unexpected 5.1 million-barrel fall in crude stocks last week was overshadowed by a 10.6 million-barrel surge in gasoline supplies, the biggest build since 1993. Demand for the motor fuel showed its first week-on-week decline of more than 1 million barrels per day. EIA/S
"As big as the crude oil drawdown was, the build in gasoline was even more spectacular and crushing to the market," said John Kilduff, a partner at Again Capital, an energy hedge fund in New York. "Gasoline was the sole source of strength within the complex, and that looks to have ended."
Brent futures LCOc1 were down $1.84 a barrel at $34.58 a barrel at 12:50 p.m. EST (1750 GMT). Earlier, it fell to as low as $34.26, its lowest level since the start of July 2004. Prices had hit an 11-year low of $35.98 a barrel just before Christmas. Brent is on track for its largest one-day drop in percentage terms in nearly five weeks.
U.S. crude futures CLc1 were down $1.66 at $34.31 a barrel, a little more than 30 cents shy of its nine-year low at$33.98 a barrel before Christmas.
With prices sliding, traders appeared to position themselves in the options space by betting that February CL300N6 and March CL300O6 prices may fall to even below $30 a barrel.
The CBOE volatility index .OVX , a gauge of options premiums based on moves in the U.S. oil exchange traded fund, was up around 5 percent by midday after it moved sideways on Tuesday.
Feeding into the overall weak market sentiment, a survey showed that China's services sector expanded at its slowest pace in 17 months in December, following on from weak factory data on Monday which also knocked markets globally. ID:nL3N14P1LU
Meanwhile, traders continued to shrug off rising geopolitical risks, including an apparent North Korea nuclear test and a rift between two of the world's largest oil producers, Saudi Arabia and Iran. still at a point where we're massively well supplied and the first quarter is where we see inventory builds," said Tariq Zahir, an analyst at Tyche Capital Advisors.
"With Saudi Arabia and Iran, I think we'll see a price war soon to keep marketshare. Prices will get lower and I think we'll hit $32 again."