(Repeats to add oil price codes)
* Violence continues between Palestinians and Israelis ahead of truce talks
* U.S. Federal Reserve chief warns budget impasse is damaging growth
* Coming Up: U.S. EIA oil inventory data; 1530 GMT
By Jessica Jaganathan
SINGAPORE, Nov 21 Brent crude rose above $110 per barrel on Wednesday on fears of supply disruption from the Middle East as clashes raged between Palestinians and Israelis despite overnight truce talks.
But gains in prices were capped by worries over oil demand, especially after U.S. Federal Reserve Chairman Ben Bernanke warned that a failure to resolve a budget crisis could lead to recession in the world's biggest crude consumer.
Fresh concerns about Europe's economy also weighed on prices a day after Moody's stripped France of its prized triple-A badge, citing uncertainty about the fiscal and economic outlook of the euro zone's second-largest economy.
Brent crude futures gained 32 cents to $110.15 a barrel by 0314 GMT, recouping some of the previous session's losses. U.S. crude increased by 30 cents to $87.05.
"There are opposing forces where the uncertainty in Europe and the United States meets with the bullish uncertainty in the Middle East, ... so I think we're going to see a volatile market," said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong.
"We're going to see some crazy volatility in the market with rising geopolitics and rising economic uncertainty. The Middle East tensions could continue to give prices some life in the near term but we suspect that the bearish economic factors will be dominant."
MIDEAST VIOLENCE, FEARS OF FISCAL CLIFF
Israeli air strikes shook the Gaza Strip and Palestinian rockets struck across the border as U.S. Secretary of State Hillary Clinton held talks in Jerusalem in the early hours of Wednesday, seeking a truce to hold back Israel's ground troops.
Hamas, the Islamist movement controlling Gaza, and Egypt, whose new, Islamist government is trying to broker a truce, had floated hopes for a ceasefire by late Tuesday; but by the time Clinton met Israeli Prime Minister Benjamin Netanyahu it was clear there would be more argument, and more violence, first.
The violence in the Middle East adds to investors' worries about the economic outlook for the United States.
Fed chief Bernanke said 2013 could be a "very good year" for the U.S. economy if politicians can strike a quick deal to avoid the so-called fiscal cliff of spending cuts and tax hikes.
Recent U.S. housing and oil inventory data, however, helped support prices.
U.S. housing starts rose to their highest in more than four years in October, suggesting the housing market recovery was gaining steam.
U.S. crude oil inventory tumbled last week due to a drop in imports, data from the American Petroleum Institute released on Tuesday showed. Total U.S. crude stocks fell by more than 1.9 million barrels in the week to Nov. 16, after analysts polled by Reuters had forecast a build of 900,000 barrels.
The market will now await data from the U.S. Energy Information Administration (EIA), due at 1530 GMT on Wednesday, for confirmation of the API report. (Editing by Miral Fahmy)