May 19 (Reuters) - Oil prices fell on Friday, as investors worried that U.S. politicians will fail to agree on a new debt ceiling and trigger a default that would hurt the economy and reduce fuel demand.

Brent futures settled 28 cents, or 0.8%, lower at $75.58 a barrel, while West Texas Intermediate U.S. crude for July expiry fell 25 cents, or 0.3%, to $71.69.

The less active U.S. crude contract for May , due to expire on Monday, closed down 31 cents, or 0.4%, to $71.55.

Brent and U.S. crude prices nevertheless notched their first weekly gains in a month, with the both benchmarks rising about 2%.

Oil gave up gains of as much as a dollar after Republicans in the U.S. House of Representatives and President Joe Biden's administration on Friday paused talks on raising the federal government's $31.4 trillion debt ceiling.

The Treasury Department has warned the government could be unable to pay all its bills by June 1.

A White House official said a deal remained possible.

Markets were also spooked by Federal Reserve Chair Jerome Powell's comments that inflation was "far above" the Fed's objective, adding no decisions had been made yet on the next interest rate action.

"It doesn't look they are going to get the debt deal done today... the chance of a 25 basis point (rate) increase in the June meeting is rising by the day... There's not a lot for the bulls to hang their hats on," said Mizuho analyst Robert Yawger.

Following reports of the paused debt ceiling negotiations and Powell's comments, U.S. stocks, Treasury yields and the dollar all moved lower.

Providing some support for markets, U.S. Treasury Secretary Janet Yellen reaffirmed the strength and soundness of the country's banking system in a meeting with bank CEOs on Thursday, the Treasury Department said in a statement.

U.S. oil rig count, an indicator of future production, fell by 11 to 575 this week, the biggest weekly drop since September 2021, energy services firm Baker Hughes Co (BKR.O) said.

Money managers cut their net long U.S. crude futures and options positions in the week to May 16, the U.S. Commodity Futures Trading Commission (CFTC) said.

While the potential for additional rate hikes increases concern about demand weakness in the United States, prices could rise on higher Chinese demand throughout 2023, said analysts from National Australia Bank.

China's oil refinery throughput in April rose 18.9% from a year earlier to the second-highest level on record, data showed this week.

Chinese refiners maintained high runs to meet recovering domestic fuel demand and build stockpiles ahead of the summer travel season.

Reporting by Laura Sanicola

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