(Reuters) - Brent crude rose more than $2 on Monday as a rescue package for Spain's banks revived hopes of steady oil demand growth, while a failure in nuclear talks between the United Nations and Iran renewed concern over supply disruption.

The larger-than-expected rescue package calmed some of the fears in financial markets over Europe's debt crisis, boosting Asian shares, the euro and base metals. Yet, investors expect volatility as the global economy remains fragile with uncertainty surrounding growth in the world's top economies.

Brent rose to as much as $102.21 a barrel and traded $1.88 higher at $101.35 by 0642 GMT. U.S. crude increased to as much as $86.64, and was $1.75 higher at $85.85 a barrel - on track for the biggest daily percentage gain since April 2.

What we are seeing is knee-jerk reaction from the market because the worse case scenario didn't happen, said Tony Nunan, a Tokyo-based risk manager at Mitsubishi Corp. The underlying problems of the euro zone haven't disappeared, and the market is going to turn skeptical again.

Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125 billion), making the country the fourth to seek assistance since Europe's debt crisis began.

Yet, with the economy contracting, one in four workers out of a job, and Greek elections next weekend overshadowing the entire zone, investors are wary how far the latest deal will go in helping the region tackle its debt crisis.

The most sensitive point for markets now is how to manage Europe, especially the weaker economies such as Greece and Spain, said Ken Hasegawa, a commodity sales manager at Newedge, Japan. We are seeing gains driven by the news on Spain. But that doesn't mean we will see prices going higher and higher.

Brent will hover around $100 a barrel, moving $5 higher or lower this week and the U.S. benchmark will stay around $85 with moves limited by the same extent, Hasegawa said.

Brent will edge up into a range of $103.30-$104.01 per barrel as a rebound from the June 4 low of $95.63 has extended, while U.S. oil will gain more into a range of $87.82-$88.01, according to Reuters technical analyst Wang Tao.

A slide in the dollar has also helped boost oil. The dollar index .DXY slipped 0.83 percent early in Asia on Monday.

The dollar is also playing a role in the market today, said Hasegawa. We had seen the euro and oil weaken earlier, and today they are gaining after the news on Spain.

IRAN, CHINA

On the supply front, fears of a disruption resurfaced with the U.N. nuclear watchdog and Iran failing to unblock a probe into suspected atom bomb research by the Islamic state, dimming chances for success in higher-level negotiations between Tehran and major powers later this month.

The International Atomic Energy Agency, using unusually pointed language, said no progress had been made in the meeting aimed at sealing a deal on resuming the IAEA's long-stalled investigation, and it described the outcome as disappointing.

It came just a few weeks after U.N. nuclear chief Yukiya Amano said he had won assurances from senior Iranian officials in Tehran that an agreement would be struck soon.

Iran is going to be an issue pushing up prices, going forward, said Nunan. Talks are not getting anywhere, as they keep failing, tensions will rise.

Oil investors are digesting a series of developments and data releases over the weekend to gauge the direction of the market. China said crude imports rose to a record 25.48 million tonnes, or about 6 million barrels per day in May, up 18.2 percent from a year ago.

Still, analysts cautioned against drawing excessively optimistic conclusions, as actual demand from users remained weak and the bulk of oil imported in May was likely to have been moved into storage. Implied oil demand inched up only 0.4 percent in May year-on-year, after April's first yearly decline in over three years.

(Editing by Ed Davies and Paul Tait)