Oil fell more than a dollar yesterday in volatile trading as fighting raged between Israel and Lebanese Hizbullah guerrillas.
The price fell sharply after Israel's Channel 10 television cited a senior military official stating that Israel could end its Lebanon offensive within days.
The Israeli government denied the report, but it was enough to prompt a round of profit-taking after a four-day rally on oil.
Concern that the conflict could spill over to neighbouring countries and affect Middle East oil supply earlier sent London Brent crude to a record high.
US light crude was down $1.33 at $75.70 (€60.45) a barrel at 5.47pm Irish time, nearly $3 below the high of $78.40 hit on Friday. Brent for September was down $1.34 at $76.24 a barrel, after touching a record $78.18 a barrel early in the session.
"Given the importance of geopolitics to the market at the moment, prices will see-saw with the news-flow," said Eoin O'Callaghan, economist at BNP Paribas.
"There has been so much geopolitical news in so short a time that you are going to get large fluctuations in prices as the news-flow changes."
Israeli aircraft blasted Lebanon yesterday after Hizbullah rockets struck deeper than ever into Israel, with no diplomatic initiative in sight to end the fighting.
Neither Israel nor Lebanon are oil producers but both lie at the heart of the Middle East, which collectively pumps nearly a third of global output.
The conflict threatens to suck in Hizbullah's Syrian and Iranian allies and to compound the conflict between the West and Iran over Tehran's nuclear programme.
"The crisis has quickly taken on a regional hue, with both Washington and Tel Aviv accusing Iran and Syria of orchestrating the attacks," said Washington-based energy consultants PFC in a report.
"As a result, US policy toward Tehran is likely to harden even further and could undermine already-fraught efforts to resolve the Iranian uranium enrichment issue diplomatically."
The world's fourth-largest oil exporter insists it is enriching uranium for electricity generation but the US fears that could be a front for bomb-making activities.
On Sunday, Iran condemned a decision to return its nuclear file to the UN Security Council after it delayed accepting incentives aimed at stopping it from developing nuclear weapons.
In Iraq, scrambling to restore its oil exports to pre-war levels, the head of the country's North Oil Company was kidnapped in the capital, the second high-profile abduction in two days.
Analysts saw no let-up in prices in the near term. "We would expect front-month prices to rise above $80 this quarter," said O'Callaghan.
"There is plenty to keep prices inflated. On the one hand geopolitics, and on the other fundamentals are tight. And we also have the possibility of hurricanes."
Opec said on Friday that high prices and slower economic expansion would moderate global oil demand growth next year.
