By Nicole Jao

NEW YORK (Reuters) -Oil prices gained more than $1 a barrel on Thursday after U.S. economic data allayed fears of recession in the world's biggest economy, although the rally was limited by concerns of slower global demand.

Brent crude futures settled up $1.28, or 1.6%, at $81.04 a barrel. U.S. West Texas Intermediate crude futures rose by $1.18, or 1.53%, to $78.16.

Data showed U.S. retail sales rose more than expected in July. Another report showed a smaller-than-expected increase in the number of Americans filing for unemployment benefits.

"The positive economic data serve as an indicator that we're heading towards a soft landing," said Bob Yawger, director of energy futures at Mizuho in New York.

Data from the Labor Department on Wednesday showed U.S. consumer prices rose moderately in July. This reinforced expectations the Federal Reserve will cut interest rates next month, which could boost economic activity and oil consumption.

Oil prices also drew support from worries about how Iran would respond to the killing of the leader of the Palestinian militant group Hamas last month.

"Geopolitics and the risk of an expanding conflict in the Middle East are propping up prices, as the threats of retaliation continue to grow louder," said Tim Snyder, chief economist at Matador Economics.

A new round of Gaza ceasefire talks was underway in the Qatari capital Doha, as Palestinian health authorities said the death toll from the war surpassed 40,000 and pressure to end the war in the Palestinian enclave mounted.

The Russia-Ukraine conflict also kept prices elevated. Russia said on Thursday it would beef up border defenses, improve command and control and send in additional forces, days after Ukraine made the biggest attack on its sovereign territory since World War Two.

Both main oil benchmarks had fallen more than 1% on Wednesday after U.S. crude inventories increased unexpectedly.

U.S. crude oil stockpiles rose by 1.4 million barrels in the week ended Aug. 9, compared with estimates for a 2.2 million barrel draw, building for the first time since late June. [EIA/S]

China's factory output growth slowed in July, while refinery output fell for a fourth month, underscoring the country's spotty economic recovery and limiting the upside for crude markets on Thursday.

(Additional reporting by Noah Browning and Alex Lawler in London, Yuka Obayashi in Tokyo and Trixie Yap in Singapore; Editing by David Holmes, Kirsten Donovan and David Gregorio)