* Fire at Lemont, Illinois refinery boosts gasoline
* China HSBC flash PMI hits 7-month high in Oct
NEW YORK, Oct 24 (Reuters) - U.S. oil futures recouped losses in choppy trade on Thursday afternoon while European Brent crude slid, as traders bet that an abrupt slump earlier this week in the hotly traded Brent-WTI spread had gone too far.
U.S. gasoline prices led the oil complex higher, rebounding from near their lowest since June 2012 after an overnight fire shut down a key refinery near Chicago. Although fuel stocks are relatively high, the unplanned outage threatens to tighten supplies at a time when many refineries are shut for work.
Dealers were also focused on ructions in the spread between U.S. West Texas Intermediate (WTI) and Brent futures, which hit a six-month high of more than $13 a barrel midday on Wednesday before snapping back to around $10 on Thursday.
"Really that spread just got too far too fast," said Richard Ilczyszyn, chief market strategist and founder of iitrader.com LLC. "It can't sustain that width. When the spread widened out we faded the rally and sold it."
The U.S. crude oil benchmark was trading 24 cents higher at $97.10 a barrel by 1:43 p.m. EDT (1743 GMT), after touching a four-month low of $95.95. U.S. crude settled at its lowest point since July 1 in the previous session.
The discount of the December U.S. oil contract to January narrowed to 11 cents after widening to 23 cents in the previous session.
U.S. crude oil prices have been declining for the last three sessions on rising supply. Oil inventories last week hit the highest level since June, according to government data. But traders said the spread had gone too far, given the likely pick-up in demand as refiners return from maintenance.
Brent crude oil was down 58 cents to $107.22 a barrel, after settling at its lowest level since Aug. 8 on Wednesday. Brent's premium over U.S. oil narrowed by as much as $1.13 per barrel to $9.81, almost touching the 200-day moving average of $9.77. It was last trading at $10.11.
CITGO PLANT PERKS GASOLINE
In the oil products market, U.S. gasoline futures rebounded off 16-month lows following news of a fire at the crude unit of Citgo's 174,5000 barrel per day Lemont, Illinois refinery.
High stockpiles following a summer of strong runs by refineries and the seasonal drop in demand have weighed on gasoline prices.
"One of the things we haven't really seen during refinery maintenance is problems with refineries," said Gene McGillian, analyst with Tradition Energy in Stamford, Connecticut.
RBOB gasoline futures gained 3.26 cents to $2.5849 a gallon after dipping to fresh 16-month low of $2.5417 a gallon earlier in the session. Heating oil traded down to a three month-low of $2.8974 a gallon.
Lingering uncertainty over the future of Scotland's Grangemouth refinery lent some support to Brent. Union leaders said they had accepted demands from Switzerland-based Ineos that may help avert closure of the refinery and nearby petrochemical plant.
Grangemouth, which supplies most of Scotland with fuel, provides steam to a plant that processes Forties, the largest crude oil stream underpinning Brent futures.
The oil market was also eyeing talks between the United States and Iran, to see when and if sanctions might be lifted. Washington described last week's negotiations as the most serious and candid to date, and the parties have agreed to meet again in Geneva on Nov. 7-8.
Any relaxation of the sanctions against OPEC member Iran could push down oil prices.
Continued concerns over Libyan supply also stemmed losses in Brent. Libya does not plan to export crude oil from its eastern Brega port in November after a fall in production from power supply issues.