UPDATE 4-Oil slips under $111 as early 2013 gains fizzle out

* Morgan Stanley sees limited near term upside for oil

* Manufacturing in U.S., China expanded in December

* Focus on ECB meeting this week (Updates prices, adds quotes)

By Alex Lawler

LONDON, Jan 7 (Reuters) - Oil eased to under $111 a barrel on Monday as some investors booked profits after last week's gains, although optimism that the world's biggest economies are on a steady recovery path limited the decline.

The crude market rallied last week after U.S. lawmakers reached a last-minute agreement to avert the so-called "fiscal cliff", or tax increases and spending cuts that would have threatened growth in the world's top oil consumer.

Brent crude fell 48 cents to $110.83 a barrel by 1200 GMT after rising 0.6 percent last week, giving up its 2013 advance. U.S. crude slipped 50 cents to $92.59 after adding 2.5 percent last week.

"Base metals are coming under pressure as well and the dollar is up, so there is a bit of risk-off sentiment in the market today," said Carsten Fritsch, analsyst at Commerzbank. "Maybe also a bit of profit-taking after the gains late last year and early this year."

Reports on Friday showed U.S. employers kept up an even pace of hiring in December and the services sector expanded briskly. This, as well as earlier data showing expansion in U.S. and Chinese manufacturing, bolstered the outlook for oil demand.

This week's focus for financial markets will be on the European Central Bank. Investors are looking to the central bank's monthly meeting on Thursday to see if it hints at an interest rate cut early this year.

Figures on Monday showed euro zone factory prices fell for the first time in five months in November, pulled down by a slide in the cost of energy and giving the ECB room to consider another interest rate cut.

Investors will also be watching the U.S. Federal Reserve's stance on monetary easing, after top Fed officials and some U.S. economists suggested the central bank might halt its asset purchases this year.

LIMITED UPSIDE

While oil supply outages and export cuts from the North Sea, South Sudan, Iran and Nigeria supported prices in 2012, the market was expected to be in surplus in 2013.

According to the International Energy Agency, supply from outside the Organization of the Petroleum Exporting Countries wil rise by 890,000 barrels per day in 2013, just ahead of the rate of global demand growth.

Morgan Stanley, in a report on Monday, was not bullish on oil's immediate prospects.

"Although we are constructive oil for the year as a whole, we see limited near-term upside, but would look to buy dips as we approach 2H13," said the report by analysts including Hussein Allidina.

OPEC oil output fell in December, surveys showed last week, partly due to curbs by top exporter Saudi Arabia in reponse to lower demand. More cutbacks by the Saudis may be needed to prevent falls in prices.

"The oil price is remarkably steady, very much the same at the beginning of this year as it was a year ago. It shows what a good job the Saudis in particular are doing," said Christopher Bellew, a broker at Jefferies Bache in London.

"The question this year will be, they were good at increasing output because of shortfalls last year, will they be as good at cutting their output back as non-OPEC output grows?" (Additional reporting by Ramya Venugopal; editing by William Hardy)