* WTI ends down after 3-month low, Brent rebounds from May low
* Brent-WTI spread play led to mixed close of two benchmarks
* U.S. crude stocks seen falling, gasoline rising - poll
* BP CEO says oil stocks will take 18 months to work off
* Coming up: API U.S. oil inventory report at 2030 GMT (Recasts, updates market activity and comments to settlement)
By Barani Krishnan
NEW YORK, July 26 (Reuters) - U.S. crude prices fell on Tuesday, hitting three-month lows, as worries over a gasoline glut outweighed expectations of U.S. crude stock declines, while Brent erased early losses to settle higher due to its better fundamentals versus U.S. crude.
The premium for Brent versus U.S. crude's West Texas Intermediate (WTI) futures was at the highest since late April as investors bet the U.K. benchmark will gain against its U.S. rival.
"The Brent-WTI spread play has picked up to Brent's advantage, given the depressing inventory situation for petroleum products in the United States," said Chris Jarvis, energy markets analyst at Caprock Risk Management at Frederick, Maryland.
WTI CLc1 settled down 21 cents, or 0.5 percent, at $42.92 a barrel. It fell to $42.36 earlier, its lowest since April 20.
Brent LCOc1 rose 15 cents, or 0.3 percent, to settle at $44.87 a barrel. Its session low was $44.14, the lowest since May 10.
Gasoline RBc1 was slightly higher at $1.3358 a gallon. The refining margin, or profit, for turning crude into gasoline 1RBc1-CLc1 also perked slightly, to $13.30 a barrel.
WTI fell ahead of oil inventory reports for last week due from industry group the American Petroleum Institute at 4:30 p.m. EDT (2030 GMT). Analysts polled by Reuters expect U.S. crude stockpiles to have fallen last week but gasoline stocks to have risen. The U.S. Department of Energy will confirm on Wednesday if that is true. EIA/S
Oil prices are still up more than 60 percent from 12-year lows of around $27 a barrel hit by Brent and about $26 struck by U.S. crude in the first quarter. But the rally has faded since the two benchmarks breached $50 in May, amid worries oil may be headed again for a glut like that which forced prices off from highs above $100 in mid-2014.
"We still see a gradual and orderly price decline going forward well into next month, with WTI values falling at an average weekly pace of around $1.25 a barrel," said Jim Ritterbusch of Chicago-based oil markets consultancy Ritterbusch & Associates.
Hedge funds and other money managers cut their net long position - bets on rising prices - in Brent and U.S. crude futures and options by 31 million barrels to 453 million in the week ending on July 19. (http://tmsnrt.rs/2aFhYTn)
Oil major BP BP.L announced lower-than-expected profit and said its refining margins were the weakest for a second quarter in six years. Chief Executive Officer Bob Dudley said it may take 18 months or so to work off the market's stock overhang.