* U.S. crude ends below $42, within range of 6-1/2-year low
* Japan economy shrank in Q2
* China slowdown adds downward pressure
* U.S. oil rigs on the rise again, adding to market woes (Adds market settlements, view on Cushing/Gulf Coast oil storage)
By Barani Krishnan
NEW YORK, Aug 17 (Reuters) - Oil fell about 1 percent on Monday, with U.S. crude settling within range of a new 6-1/2-year low, after No. 3 oil consumer Japan said its economy contracted in the second quarter and China's slowdown continued to weigh on sentiment.
A stronger dollar .DXY , after a report that U.S. industrial output grew at the fastest pace in eight months, also made greenback-denominated commodities, including crude, less affordable for holders of the euro and other currencies. USD/ ID:nL1N10P0Q2
U.S. light crude CLc1 settled down 63 cents, or 1.5 percent, at $41.87 a barrel. Monday's intraday low of $41.64 came within striking distance of Friday's low of $41.35, the weakest front-month price since March 2009. Trading in expiring options for U.S. crude dominated the action.
Brent LCOc1 , the global crude benchmark, settled down 45 cents, or nearly 1 percent, at $48.74 a barrel. It earlier hit a session low of $48.35, about $3 above its six-year low of $45.19 set in January.
Japan's economy shrank at an annualized pace of 1.6 percent in the second quarter. China fixed its exchange rate slightly higher for the second day running, after a surprise devaluation last week sliced 3 percent off the yuan. ID:nL3N10R0KA ID:nL3N10S1EH
"The general talk in the market is about the continued ripple effect from the Chinese devaluation," said David Thompson at Washington-based energy-specialized commodities broker Powerhouse.
Oil has lost about a third of its value since June.
U.S. crude itself has fallen for seven weeks in a row, after another rise last week in U.S. oil rig additions that hinted at growing production.
Demand for U.S. crude and Brent is likely to fall further in the next few weeks as U.S. and European refineries start maintenance for autumn, traders said. ID:nL5N10N3UK
Some say the slowdown in refining raises the specter of oil supplies reaching capacity over the next few months at the Cushing, Oklahoma delivery point for U.S. crude and elsewhere on the U.S. Gulf Coast.
Others dispute this.
"I really don't see the Cushing or Gulf Coast storage tank-topping scenario in 2015 but more of a possibility in first-quarter 2016," said Scott Shelton, commodities specialist at ICAP (LONDON:IAP) in Durham, North Carolina.
Money managers and hedge funds have cut their combined net long positions in U.S. crude to 2010 lows and in Brent to December 2014 lows, on an apparent building consensus that oil prices will likely remain low for a while, data shows. ID:nEONF8B0RU ID:nEMN2CHXOF