UPDATE 5-Oil edges up on China data, weak dollar

* China Q4 GDP growth 8.9%, Dec factory output up 12.8%

* Oil pares gains as U.S. traders return to desks

* German ZEW economic sentiment makes biggest ever jump (Recasts, adds fresh quotes, updates prices)

By Claire Milhench

LONDON, Jan 17 (Reuters) - Oil prices edged up on Tuesday to around $111.50 a barrel, supported by a weaker dollar and by hopes of steady oil demand growth after China, the world's second-largest oil consumer, posted stronger-than-expected economic growth.

Brent crude futures were up 24 cents at $111.58 a barrel by 1506 GMT after flirting with a negative move as U.S. traders arrived at their desks.

U.S. crude was up $1.44 from Friday's closing price to $100.14 a barrel. There was no settlement price for the benchmark on Monday because of a U.S. holiday.

Analysts and traders said China's 8.9 percent fourth-quarter GDP growth had helped lift commodities and equities early in the session but some of the gains were subsequently given up as market volumes picked up.

"Crude rallied this morning in very thin volumes, but now the U.S. traders have returned, so the market is paring gains," said James Zhang, an energy analyst at Standard Bank.

"Most of it is WTI playing catch-up from the holiday," added John Kilduff, a partner at hedge fund Again Capital in New York. "Brent looks to be reflecting the euro zone concerns. The China GDP was good, but exports were down and that highlights the slowdown in Europe."

The Chinese growth figure was the weakest in two and a half years but still better than a forecast of 8.7 percent made by economists in a Reuters poll. This helped oil prices and equities rally early in the session.

Investors had been concerned that Europe's debt problems would reduce demand for Chinese goods, forcing China's factories to pare output and reduce energy consumption.

But China's implied oil demand climbed to an all-time high of 9.64 million barrels per day in December, up 0.4 percent from a year earlier, and finished 2011 with 6.8 percent growth.

In addition, because the GDP data showed that growth was slowing, some traders and investors were hopeful that the Chinese might begin monetary easing.

Zhang poured cold water on this, arguing that because the Chinese New Year holiday is fast approaching, little change can be expected for the time being. "The hopes of monetary easing are misplaced I think," he said.

POSITIVE DATA

Although U.S. traders playing catch-up forced the market to pare gains mid-session, the general trend remained to the upside, following a steady stream of positive data on Tuesday.

German analyst and investor sentiment recorded its biggest ever rise, with a January reading of -21.6 from the Mannheim-based ZEW economic think-tank, improving from -53.8 in December.

The jump was attributed to upbeat economic data as well as the European Central Bank's massive injection of cash last month, which has left banks awash with money.

The positive trend continued in the United States, where the New York Fed's Empire State manufacturing index rose to 13.48 in January, beating economists' expectations.

Oil was also underpinned by a weaker dollar, with the U.S. currency down 0.42 percent against a basket of currencies at 1500 GMT as the bundle of supportive data encouraged investors to embrace riskier assets.

Investors and traders continued to eye Iranian tensions, but Zhang said he saw some near-term softness in the crude markets given that developments so far remained restricted to rhetoric.

Denmark, which currently holds the European Union presidency, has proposed that EU states introduce a full embargo on the imports of Iranian crude from July 1, after ending a possible grace period for existing contracts, EU diplomats said on Tuesday. (Additional reporting by Manash Goswami in Singapore and Robert Gibbons in New York, editing by Jane Baird)