UPDATE 2-Brent edges above $114 on firm euro; China data caps gains

* Slightly firmer euro versus dollar supports oil

* China's Feb HSBC flash PMI retreats from 2-year high

* Brent to hover above $113.59 for one more session -technicals

* Market eyes Italy election for indications on Europe situation

* Coming Up: Dallas Fed manufacturing index; 1530 GMT

(Recasts, adds comments, updates prices)

SINGAPORE, Feb 25 (Reuters) - Brent crude wiped out early losses to trade above $114 per barrel on Monday as a firmer euro supported prices, although worries that a retreat in China's manufacturing activity would dent demand from the world's top energy consumer capped gains.

Prices are expected to be bound in a tight range ahead the outcome of elections in Italy, which investors are keenly watching to gauge what the implications of that would be for euro zone cohesion and appetite for riskier assets.

Oil prices dropped to near multi-week lows earlier in the session 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.

Brent gained 42 cents to $114.52 a barrel by 0905 GMT, after sliding to as low as $113.73 -- less than 50 cents away from a three-week low of $113.32 hit last week.

U.S. oil rose 30 cents to $93.43, after falling to as low as $92.96 -- near a more than one-month trough of $92.44 hit in the previous session.

A slightly firmer euro versus the dollar supported oil, which is traded in the greenback.

"Oil will trade in a tight range today till Italy's election results are out," said Ken Hasegawa, a commodity sales manager at Newedge in Tokyo. "Investors want to get a sense how things will unfold in Europe."

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.

For the euro zone, the stakes are high. 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.

Brent is expected to hover above a support at $113.59 for one more session before breaking this level and falling to $111.97, while U.S. oil may rebound to $94.17, according to Reuters technical analyst Wang Tao.

Hasegawa expects Brent to trade within a tight range of $113 and $115 a barrel over the next 24 hours.

UNITED STATES

In the United States, investors await testimony on Tuesday from Federal Reserve Chairman Ben Bernanke for further clues of whether the Fed will slow or stop buying bonds.

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. Brent fell nearly 2 percent on Thursday alone, its steepest since November, during the two-day sell-off fuelled by those worries. It ended the week down 3 percent.

Markets are also worried about the outcome of U.S. budget as the White House and the Republicans have so far failed to reach an agreement. The Republicans want President Barack Obama to be flexible on how cuts are made, while the White House says the law forces across-the-board cuts.

With five days left before $85 billion is slashed from U.S. government budgets, the White House issued more dire warnings about the harm the cuts will do to Americans.

"The Italian election result and the outcome of Congressional negotiations on the automatic U.S. budget cuts are the major risk events for this week," Ric Spooner, chief market analyst at CMC Markets said in a report.

"Both have the potential to influence consensus attitudes toward global risk."

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."

(Editing by Himani Sarkar)