* U.S. crude stocks down 4.2 mln bbls last week -EIA
* Reuters poll had forecast 2.5 mln draw, API 5.1 mln
* Market fails to test $50 level as profit-taking sets in
* Gasoline futures slide after EIA reports 2 mln-bbl build (Adds settlement prices, updates to close)
By Barani Krishnan
NEW YORK, May 25 (Reuters) - Oil prices rose about 2 percent on Wednesday after the U.S. government reported a larger-than-expected drop in crude inventories, but profit-taking after the data kept prices below the $50 a barrel level that oil bulls had been hoping for.
The U.S. Energy Information Administration said crude inventories fell 4.2 million barrels in the week to May 20. While the decline was steeper than the 2.5 million barrels forecast by analysts in a Reuters poll, it was not as much as the 5.1 million expected by trade group American Petroleum Institute. EIA/S API/S
Crude futures fell briefly after the EIA data showed the steepest weekly drop in seven weeks, then consolidated and traded at the lower end of the day's gains.
Brent LCOc1 settled up $1.13, or 2.3 percent, at $49.74 a barrel. Prices climbed as high as $49.96 in post-settlement trading.
U.S. crude's West Texas Intermediate (WTI) CLc1 settled 94 cents higher at $49.56, after peaking at $49.62, a seven-month high.
Profit taking heading into the U.S. Memorial Day weekend also pressured prices, traders said.
Oil bulls have been hoping in recent weeks that crude would rise to $50 a barrel or more, after global crude flows declined nearly 4 million barrels per day due to wildfires in Canada's oil sands region, a near economic meltdown in OPEC member Venezuela and a spate of violent attacks against the Libyan and Nigerian energy industries. we do feel the rally could go slightly further and test the psychological $50 level, we also think the rally has been priced in, especially with the impact expected from Canadian wildfires," said Tariq Zahir, crude trader and portfolio manager at Tyche Capital Advisors in New York.
"So, we wouldn't be surprised to see more profit taking from the longs, especially since there was no immediate follow-through in buying after the data."
U.S. gasoline futures RBc1 fell nearly 1.5 percent to around $1.63 a gallon after the EIA reported that stockpiles of the motor fuel USOILG=ECI rose over 2 million barrels last week, confounding analysts' expectations for a 1.1 million-barrel drop.
"Gasoline looks to be the weakest horse right now and the momentum of the recent rally that started on May 10th now looks to be breaking down," said David Thompson, executive vice-president at commodities broker Powerhouse in Washington.
He said the picture could worsen for gasoline if futures for the motor fuel break below the $1.60 support. "The bears will be encouraged to increase their selling pressure."