What is the significance of "conceits" in this excerpt from Chapter 6 of The Great Gatsby? Is there a metaphor connecting "drowsiness closed down upon some vivid scene with an oblivious embrace" to "conceits"?

But his heart was in a constant, turbulent riot. The most grotesque and fantastic conceits haunted him in his bed at night. A universe of ineffable gaudiness spun itself out in his brain while the clock ticked on the wash-stand and the moon soaked with wet light his tangled clothes upon the floor. Each night he added to the pattern of his fancies until drowsiness closed down upon some vivid scene with an oblivious embrace. For a while these reveries provided an outlet for his imagination; they were a satisfactory hint of the unreality of reality, a promise that the rock of the world was founded securely on a fairy’s wing.

The term "conceit" has two general meanings, both of which have a bearing here. Most broadly the term refers to ideas upon which other ideas or plans are made. The basic idea for any novel can usually be described as a conceit in this regard (eg. conceit = conceptual notion). 

The other meaning commonly attached to this term relates to arrogance. In this sense, conceit is a false exaggeration of one's worth. 

Each of these can be read as part of the meaning in Fitzgerald's use of the term. 

In this passage, a retrospective Gatsby is depicted as dreaming of the vast and ostentatious material success that he actually does achieve. The shape or outward manifestation of his achievement of wealth is all part of Gastby's plan, his conceptual notion of success. 

The language used to personify drowsiness is metaphorical, but does not directly connect to the idea of Gatsby's conceits. Metaphor, again speaking generally, can be taken as a term describing most uses of figurative language (non-literal language). 

How does the language in the following excerpt from The Great Gatsby create a dreamlike world?

But his heart was in a constant, turbulent riot. The most grotesque and fantastic conceits haunted him in his bed at night. A universe of ineffable gaudiness spun itself out in his brain while the clock ticked on the washstand and the moon soaked with wet light his tangled clothes upon the floor. Each night he added to the pattern of his fancies until drowsiness embrace. For a while these reveries provided an outlet for his imagination; they were a satisfactory hint of the unreality of reality, a promise that the rock of the world was founded securely on a fairy's wing.

The hyperbolic language throughout the passage helps to create a sense of a dreamlike world. For example, words like "grotesque," "fantastic," and "turbulent" are evocative of very vivid, exaggerated, dramatic, and lively images.

The passage is also full of metaphors, which adds to the sense of an exaggerated, slightly unreal world. For example, the metaphor, "A universe of ineffable gaudiness spun itself out in his brain," connotes images of infinite spider webs unravelling inside Gatsby's head. Also, the metaphor, "the moon soaked with wet light his tangled clothes" is likewise very vivid and rather surreal. These metaphors conjure images which might seem at home in a Salvador Dali painting.

The metaphor at the end of the passage ("the rock of the world was founded securely on a fairy's wing") also contributes to the overall sense of an otherworldly, dreamlike world. This particular image is rather childlike, implying Gatsby's stunted psychological growth. If the metaphors noted above suggest Salvador Dali, this metaphor of a world balanced precariously on a fairy's wing suggests Alice In Wonderland.

In addition to what others have said, we can analyze the connotation of many of the words in this passage to gain some insight into Gatsby's character and his future. Connotation refers to the emotions or emotional quality that the word carries; it's like a word's emotional baggage——what it brings with it from previous usage. So many of the words in this quotation are negative or upsetting or even violent: words like turbulent, riot, grotesque, haunted, gaudiness, soaked, tangled. A man who thinks and feels this way is not a happy man. He is a man who deals in distortion and artifice, someone who is unbounded by the nature of reality. In fact, he does not seem to think of reality as, well, real. For Gatsby, then, whatever he can imagine is his reality, and he is comforted by the idea that "the rock of the world was founded securely on a fairy's wing." However, fairies aren't real, and if they were, their wings would be so thin and slight that we sure wouldn't want to rest the rock of the world on them. Thus, for Gatsby, reality's unreality is comforting; for most, it would feel terrifyingly vulnerable. But Gatsby doesn't seem to realize how vulnerable he really is, and this cannot bode well for the character.

This passage is in Chapter 6, in a part where we are seeing the time when Gatsby was still a nobody in Minnesota.

I think that the language in this paragraph creates a dreamlike world both in the words that are used and the way the sentences are made.  Some of the words that Fitzgerald uses just sound dreamlike.  He talks about "grotesque and fantastic" images.  He talks about the "ineffable gaudiness" of the "vivid scene(s)" of Gatsby's thoughts.  All of these words can have a very surreal connotation.

In addition, some of the sentences seem convoluted and dreamlike themselves.  I am thinking particularly of the one that goes

A universe of ineffable gaudiness spun itself out in his brain while the clock ticked on the wash-stand and the moon soaked with wet light his tangled clothes upon the floor.

This sentence is, to me, somewhat run-on and disjointed, just like dreams often are.