* Brent futures rise more than $1.50 supported by weak dollar
* China's Feb HSBC flash PMI retreats from 2-year high
* Market eyes Italy election for indications on Europe situation
* New talks on Iran's nuclear programme to start on Tuesday (Updates throughout, changes dateline from previous SINGAPORE)
By Ron Bousso
LONDON, Feb 25 (Reuters) - Brent crude rose close to $116 a barrel on Monday due to a weaker dollar, while investors awaited the outcome of Italy's elections to gauge the troubled region's economic outlook.
Prices reversed earlier losses over worries that a retreat in China's manufacturing activity would dent demand from the world's top energy consumer.
Brent gained $1.66 to $115.76 a barrel by 1118 GMT, after sliding to as low as $113.73. U.S. oil rose 82 cents to $93.95.
Investors are awaiting Tuesday's testimony from U.S. Federal Reserve Chairman Ben Bernanke for further clues of whether and at what levels the Fed will maintain its bond-buying stimulus programme.
"The latest U.S. data on employment, manufacturing and inflation suggest that the Federal Reserve will not change direction anytime soon," said David Hufton from PVM brokerage.
Financial markets were rattled last week after minutes of the Fed's January meeting suggested some Fed officials were mulling scaling back its strong monetary stimulus earlier than expected.
"Expectations of further U.S. bank stimulus ahead of Bernanke tomorrow is weakening the dollar against commodities and we are seeing a bit of an uptick," said Michael Hewson, analyst at CMC Markets.
The U.S. dollar index was down 0.32 percent at 11.32 GMT and the euro was stronger while awaiting the results of Italy's parliamentary election.
Italians finish voting on Monday in one of the most closely watched and unpredictable elections in years, with rising concern that the ballot may not produce a government strong enough to pull Italy from its economic slump.
First exit polls are expected shortly after ballots close at 1400 GMT.
Italy is the third largest economy in the 17-member bloc and the prospect of political stalemate could reawaken the threat of dangerous market instability.
IRAN
Oil prices dropped earlier on Monday as China's HSBC flash purchasing managers' index (PMI) for February slipped to 50.4, down from the previous month's best reading since January 2011. The weak number also weighed on Asian shares and base metals.
"This hints at the first worsening of economic activity in the country in five months and also serves as a reminder that the road to economic recovery will remain bumpy," analysts at Vienna-based JBC Energy said.
Prices are also in a narrow range ahead of talks on Tuesday between Iran and global powers to resolve the ongoing crisis over Tehran's disputed nuclear programme.
The six powers, known as the P5+1, are set to offer Iran some relief from international sanctions if it agrees to curb its production of higher-grade enriched uranium.
The West says Iran's enrichment of uranium demonstrates its intent to develop a nuclear weapons capability, an allegation the Islamic republic denies. Worries over an escalation in tension and disruption of supplies have kept Brent above $100 a barrel through most of 2012 and this year.
"Any progress in these discussions could be positive for equity markets and modestly bearish for crude oil prices," said Jason Schenker of Prestige Economics said in a report. "Significant progress, however, is not very likely." (Additional reporting by Manash Goswami; editing by Himani Sarkar and Keiron Henderson)
