Oil edged below $108 a barrel on Monday as investors remained concerned over the progress of U.S. budget deficit reduction talks, countering support from signs of a brighter economic outlook in China.

The first real movement in U.S. "fiscal cliff" budget deficit talks began on Sunday, with Republican House Speaker John Boehner edging closer to President Barack Obama's key demands on taxation. But investor concern over the pace of progress was weighing on markets, including European stocks.

"The U.S. economy is on a good track but we need the resolution of the fiscal cliff," said Andrey Kryuchenkov, analyst at VTB Capital. "Until then, from the point of view of investors, let's wait and see when we have a definite solution."

Brent crude for February was down 20 cents at $107.98 a barrel by 1258 GMT, having earlier risen as high as $108.50. U.S. crude for January was down 6 cents to $86.67.

Oil had gained on Friday after surveys showed China's manufacturing sector grew in early December and that U.S. factories were having their best month since April.

"Brent has been having some short-term support at $108. Today it's broken below $108 but it certainly hasn't collapsed as a result," said Christopher Bellew, a senior oil broker at Jefferies Bache in London.

The United States and China are the world's largest and second-largest oil consumers, and stronger economies would boost fuel use. At present, forecasters such as the International Energy Agency expect sluggish oil demand growth in 2013.

Brent hit a 2012 high of $128 in March and is on course to end the year little changed in percentage terms as economic worries have countered price-supporting supply disruptions in the Middle East and other regions such as the North Sea.

On investors' horizon next year will be the continuing dispute between Iran and six world powers over Tehran's nuclear programme, and any further impact on Iran's crude oil exports as a result of Western sanctions.

Iran's oil revenues have been cut in half this year from a year ago, a newspaper quoted Iran's economic minister as saying, an acknowledgment of how deeply sanctions are cutting Tehran's chief source of funds.

Concern also persists over wider Middle East supply disruptions. Iran plans to hold military drills in the Strait of Hormuz by next March, Iranian media quoted a commander from the Islamic Revolutionary Guards Corps (IRGC) as saying.

Iranian officials have said Iran could block the strait, through which 40 percent of the world's seaborne oil exports pass, if it comes under military attack over its nuclear work, which Tehran says is for peaceful energy purposes. (Additional reporting by Florence Tan; editing by Alison Birrane)