Oil prices dropped more than $1 yesterday as Iraq increased exports after mending sabotaged pipelines and extra supplies from the OPEC cartel reassured international markets.

US light crude settled down $1.31, (€1.08) or 3.5 per cent, to $36.24 a barrel, as the improvement in Iraq's exports coincided with yesterday's earlier-than-expected handover of sovereignty to the Iraqis. Oil hit a midday low of $35.90 a barrel, the lowest level in two months.

Oil prices have ebbed from 21-year highs at more than $42 a barrel earlier in June as evidence has emerged that more oil is hitting the market from OPEC producers, bringing stock levels into a more comfortable zone with the United States in the peak summer driving season.

London's Brent crude was $1.27 down at $33.70 a barrel.

Prices fell as the head of Iraq's State Oil Marketing Organisation said yesterday that exports from its two southern ports were close to two million barrels a day.

Attacks on Iraq's oil infrastructure have held the country's sales well below a pre-war capacity of 2.2 million bpd. Exports ground to a halt for six days earlier this month due to sabotage at two pipelines feeding the country's southern terminals.

Iraq's oil facilities have been under persistent attack in the run up to the formal transfer of power from the US-led occupation to an interim government.

"The Iraqi handover may have gone ahead but the US-backed government is likely to be challenged with further sabotage against core facilities, including oil, and major supply disruptions look probable in the coming months," said Ms Catherine Hunter of analysts WMRC.