* China crude imports up in January, imports from Iran drop
* Italian election exit polls point to hung parliament
* Gold rallies most in nearly five months
* New talks on Iran's nuclear program to start on Tuesday (New throughout, updates with latest on Italian election, adds information on gold rally)
By Gabriel Debenedetti and David Sheppard
NEW YORK, Feb 25 (Reuters) - Brent crude rose on Monday after official Chinese data showed strong demand in the world's second-largest oil consumer, but early gains shrank as uncertainty surrounding the Italian election sparked fears the euro zone crisis could be reignited.
Brent rose more than 1 percent after Chinese customs data showed a large rise in crude imports in January, but then oil turned sharply lower after a strong showing in Italian elections by groups opposed to the country's economic reforms.
Equity markets and the euro fell hard in late afternoon trading in New York on fears Italy will not be able to form a stable government, dragging oil and other industrial commodities lower. Gold gained its most in nearly five months as traders sought out safe-haven investments.
"It seems like we've had an emotional turnaround," said Phil Flynn, an analyst at Price Futures Group in Chicago.
"We started off on the bullish foot this morning with China and we also had optimism that the Italian election would have a happy outcome, but it doesn't look like we have a happy outcome. It looks like we have a confusing outcome."
Italy's center-left coalition holds a slim lead over former Prime Minister Silvio Berlusconi's center-right bloc in the election for the lower house of parliament, three TV projections indicated. But any government must also command a majority in the Senate, a race that is decided by region.
The resulting gridlock in parliament could lead to new elections and cast into doubt Italy's ability to pay down its debt, leading to fears that the euro zone's problems could once again destabilize the global economy.
Brent crude rose as much as 1.5 percent in early trade to a high of $115.87 a barrel, but the future contract for April delivery settled just 34 cents higher at $114.44 a barrel.
In after hours trading it slipped to a low of $113.31 a barrel as U.S. equity markets suffered their biggest loss since November. The euro posted a near 2 percent swing against the dollar, moving from 1 percent up in early trading to almost 1 percent down.
U.S. crude settled down 2 cents a barrel at $93.11, well off an earlier high of $94.46, and slipped to a low of $92.07 after hours.
Chinese oil imports rose more than 7 percent in January from a year earlier, customs data showed, while its imports from sanction-hit Iran dropped by about a third, spurring fears of a tighter market.
Robust demand growth from China contributed to a near $10 rally in Brent prices at the start of the year, but prices slipped 3 percent last week after oil industry sources said Saudi Arabia was preparing to increase second quarter output.
Oil traders were also waiting for Tuesday talks in Kazakhstan between Iran and global powers over Tehran's disputed nuclear program to see if long-running tensions with the OPEC member may ease.
Six countries - the United States, Russia, China, Germany, Britain and France - are set to offer Iran some relief from international sanctions if it agrees to curb production of higher-grade enriched uranium, a U.S. official said on Monday.
Oil prices were also pressured by forecasts for the sixth consecutive rise in U.S. crude oil stocks last week.
A Reuters poll ahead of Tuesday's American Petroleum Institute numbers and Wednesday's U.S. Energy Information Administration data showed that crude stocks are expected to rise 2.3 million barrels in the week ending February 22.
Distillate stocks were expected to show a drop of 1 million barrels, and gasoline stocks were expected to have fallen by 400,000 barrels.
Investors are also awaiting Tuesday's 10 a.m. EST (1500 GMT) testimony from U.S. Federal Reserve Chairman Ben Bernanke for clues on whether, and at what levels, the Fed will maintain its bond-buying stimulus program.
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.
(Additional reporting by Robert Gibbons in New York, Ron Bousso in London, and Manash Goswami in Singapore; editing by Keiron Henderson, Anthony Barker, Bob Burgdorfer, Leslie Gevirtz and David Gregorio)