By Arathy Somasekhar

(Reuters) - Oil prices edged higher on Thursday, recouping some of the more than 1% losses from the previous session after U.S. crude inventories rose much more than estimated.

Brent crude futures rose 44 cents, or 0.59% to $75.40 at 0003 GMT, while U.S. West Texas Intermediate crude futures climbed 45 cents, or 0.64%, to $71.22 as an exchange of heavy fire between Israel and Hezbollah continued to worry markets about supply.

Brent was on track for a 3.2% gain in the week, while WTI was set to rise 2.9%. Last week oil fell more than 7% on worries about Chinese demand and easing concerns about potential disruptions of Middle East oil supplies.

U.S. crude inventories rose by 5.5 million barrels last week, according to the U.S. Energy Information Administration on Wednesday, compared with analysts' expectations in a Reuters poll for a 270,000-barrel rise.

On the broader economic front, activity in the U.S. was little changed from September through early October while firms saw an uptick in hiring, continuing recent trends that have reinforced expectations the Federal Reserve will opt for a smaller 25-basis-point reduction in borrowing costs in two weeks.

A string of stronger-than-expected economic data on consumer spending, job gains and inflation recently has caused investors to dial back bets on the pace and extent of U.S. rate cuts.

Smaller-than-expected rate cuts will temper the reduction in borrowing costs, which in turn could affect economic activity and oil demand.

Meanwhile, Israeli strikes pounded Beirut's southern suburbs on Wednesday and Hezbollah said it fired precision guided missiles for the first time at Israeli targets, keeping markets nervous about supply.

The intensifying exchanges of fire come as Washington makes a final major push for peace between Israel and Iran-backed groups Hezbollah and Hamas before the Nov. 5 U.S. presidential election that could alter U.S. policy in the Middle East.