Oil fell a dollar today in volatile trading after a report, quickly denied, that Israel could end its offensive against Lebanese Hezbullah guerrillas within days.
Oil tumbled after Israel's Channel 10 television carried the report, citing a senior military officer.
An Israeli government spokeswoman quickly responded, saying Israel had no plan to halt the offensive as of yet.
Concern that the conflict could escalate and spread to Middle East oil producers had earlier sent London Brent crude to a record high.
London Brent for September was down $1.08 at $76.52 a barrel earlier, after touching a record $78.18 a barrel.
US light crude was down 92 cents at $76.11 a barrel.
"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 after Hizbollah 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.
With the brunt of the U.S. hurricane season still to come, oil futures contracts for later delivery were trading above $80 from November 2006 to July 2007, pointing to sustained strength.
"We would expect front-month prices to rise above $80 this quarter," said Mr 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." Analysts have expressed concerns about the effects of high energy prices on global economic growth. But US Energy Secretary Sam Bodman said on Friday the economy of the world's top energy consumer has held up against rising fuel costs.