By Shariq Khan

NEW YORK (Reuters) -Oil prices rose by more than $1 a barrel on Tuesday as the U.S. dollar index fell to its lowest level in more than a week and investors shifted their focus away from tensions in the Middle East to the state of global economies.

Brent crude futures rose $1.42, or 1.6%, to settle at $88.42 a barrel and U.S. West Texas Intermediate crude futures climbed $1.46, or 1.8%, to $83.36 a barrel.

The U.S. dollar index weakened after S&P Global data showed U.S. business activity cooled in April to a four-month low on weaker demand. A cheaper greenback typically lifts demand for dollar-denominated oil from investors holding other currencies.

More support for prices came from euro zone data that showed business activity expanding this month at the fastest pace in nearly a year.

"The market has been under pressure from little to no growth out of the euro zone, so anything showing improvement should be supportive," said Andrew Lipow, president of Lipow Oil Associates.

Market participants are looking past geopolitical disruptions to focus on economic indicators and overall supply-and-demand balances, Lipow added.

Both contracts had dropped by more than $1 a barrel early in the session on easing tensions between Israel and Iran, along with nagging concerns on demand from top oil importer China.

"On one hand there are still lingering doubts about the performance of China's economy, while on the other is an overriding sentiment that OPEC will hold firm on its price supportive actions," said Gaurav Sharma, an independent oil analyst in London.

Investors are looking to the release later this week of U.S. first-quarter gross domestic product data as well as the March figures for personal consumption expenditures, the Fed's preferred inflation gauge.

"A low GDP number of under 3% could cool the Fed's nerves some and provide less pressure to commodities," said Alex Hodes, an oil analyst at brokerage firm StoneX. "However, a stronger than 3% reading could cause the dollar to rally further, which would put more pressure on commodities."

U.S. crude oil inventories are expected to have increased last week while refined product stockpiles are likely to have fallen, a preliminary Reuters poll of analysts showed.

The American Petroleum Institute reported on Tuesday that U.S. crude oil and gasoline stockpiles fell last week, while distillates - which include diesel and heating oil - rose, according to market sources. [API/S]

The U.S. government's official data will be published by the Energy Information Administration at 10:30 a.m. EDT (1430 GMT) on Wednesday.

(Reporting by Shariq Khan in New York, Deep Vakil in Bengaluru, Mohi Narayan in New Delhi; Editing by David Gregorio, Paul Simao and Jamie Freed)