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If I did a level check after a quick run the oil would be 1/2 way on the dipstick (I have the shorter dipstick on my engine). When checked in the morning the oil level would be back to the top. Is this normal? Have I got the correct oil fiilter? Is there a fault somewere I don't know about, the last thing I want to do is wreck my nice new rebuilt engine (when I have finished it later today hopefully!)
.. Gravity etc. Try a search for more information, IIRC there has been a topic on that in the last few months."simple" for someone who is able to rebuild an engine. 
(a little) and hand crank for a while (with a socket on the crank and leads connected) to get the oil pumping and covering everything, then start away 
Somehow I feel I misunderstood your question since it seems rather
No, you have not misunderstood, maybe i need to be a bit more specific, the sump holds 3.3L to full (from memory). After starting the car the dipstick indicates half, assuming, lets say, 1.3L (nice easy number) to make a mark on the dipstick then when I start the car I loose 1L of oil, this is alot, for any car, normally only seen on a filter change. After leaving overnight, or even shorter, the oil level is up to full again, this means 1L has drained back, graviy or not, I have never had an engine that "holds" 1L of oil in the internal spaces. So as you can see, this is not as "simple" as it seems, although reading the rest of your post it seems that I may have fallen fowl of a cheapy oil filter, its a wix item. I have replaced it with a Fram item on my rebuilt engine, which will hopefully cure the symptons. The engine is now running, I just need to set it up.
I will check my car in the morning, if it's drained I will get a Toyota one I don't fancy lunching my engine before I get a chance to drive it!! Regards MATT!