(Updates with closing prices)
By Eric Onstad
LONDON, Jan 17 (Reuters) - Aluminium fell on Thursday after a vote by U.S. lawmakers cleared the way for sanctions to be lifted on major producer Rusal, potentially increasing supply.
The U.S. Senate on Wednesday rejected legislation to keep sanctions on companies linked to Russian oligarch Oleg Deripaska, including Rusal.
In December, the U.S. Treasury said it would lift sanctions on Rusal, the world's largest aluminium producer outside China.
But analyst Nicholas Snowdon at Deutsche Bank said the widespread perception that the lifting of sanctions will result in more supply was misguided.
"It's incorrect to see it as a bearish development. The market has been in deficit, so traders have reduced inventories. It's not an additional surplus to the market that hasn't already been accounted for," he said.
"We've certainly started to see some short covering play out in China over the last couple of sessions."
According to estimates by broker Marex Spectron, the net speculative short position on the London Metal Exchange is at 31 percent of open interest, levels not seen since 2015 when the short reached 47 percent of open interest in mid-August.
Benchmark LME aluminium fell 0.1 percent to $1,858 a tonne in closing open outcry trading, recouping losses after touching an intraday low of $1,822.50.
* WEAK ACTIVITY: A combination of uncertain macro elements, including a slowdown of China's economy, was curbing activity on metals markets, Snowdon said. "Broadly, conviction remains low. You're caught between the crosswinds of continued weakness in the Chinese macro data, but clearly a more proactive policy on the environment."
* CHINA STIMULUS: Some metals gained, helped as China announced more stimulus, with the country's central bank injecting more cash into the financial system, bringing the amount for the week to 1.14 trillion yuan ($168.74 billion)
* CHINA COPPER: Copper on the Shanghai Futures Exchange has flipped into backwardation amid a promise of value-added tax (VAT) cuts in China, which has increased near-term demand for physical copper, brokerage Jinrui Futures said in a note.
Three-month LME copper finished up 0.4 percent at $5,992 a tonne, the highest since Jan. 9.
* NICKEL: The discount of cash LME nickel to the three-month contract CMNI0-3 surged to $66.50 from $9.00 the previous day. Analysts said the spread had tightened due to temporary factors related to the expiry of an LME monthly nickel futures contract on Wednesday.
* PRICES: LME nickel shed 0.3 percent to close at$11,590 a tonne, zinc climbed 2 percent to $2,547, the highest since Dec. 27, lead fell 0.6 percent to $1,963 and tin ended up 0.1 percent at $20,585.
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Addtionial reporting by Naveen Thukral in SINGAPORE and Tom Daly in BEIJING; Editing by Alexander Smith and David Evans