* U.S. budget compromise hopes, weak dlr lifts commodities
* Gold adds 1 percent, copper up 2 percent
* Oil gains nearly 3 pct on Israeli-Palestinian tension
* Grains, softs also rise; sugar up 4 percent
By Karl Plume
CHICAGO, Nov 19 (Reuters) - Oil rallied nearly 3 percent on Monday to the highest level since mid-October on worries about escalating violence in the Middle East and on signs of progress in talks to avert a looming U.S. budget crisis.
Gold climbed 1 percent, clawing back all of last week's decline, and copper rose to a two-week high in a broader commodities market rally that also bolstered grains and softs.
The Thomson Reuters-Jefferies CRB index, a global commodities benchmark, notched its steepest gain in two weeks and jumped to a 3-1/2 week peak as the dollar slipped 0.5 percent.
Top Democratic and Republican lawmakers appeared confident they could reach a deal to avert tax hikes and spending cuts which could send the U.S. economy back into recession, boosting investor appetite for risk.
"There is a little confidence that the chatter that came out last week between the president and congressional leaders might be working toward an agreement," said Gene McGillian, analyst, Tradition Energy in Stamford, Connecticut.
Oil traders also focused on the growing Israeli-Palestinian conflict.
Israel bombed targets in the Gaza Strip for a sixth day on Monday and said it was prepared to step up its offensive by sending in troops, although it preferred a diplomatic solution.
Previous Middle East wars have led to oil embargoes and temporary disruptions to energy supplies, but analysts said it was unlikely the conflict would widen in the region, which supplies a third of the world's crude.
"There's no oil being lost, obviously. But it's just the follow-on effect. No one likes confrontation anywhere near the Gulf region," said Rob Montefusco, oil broker at Sucden Financial in London.
Front-month Brent crude for January delivery rose $2.75, or 2.52 percent, to settle at $111.70 a barrel. U.S. January crude rose $2.36, or 2.7 percent, to $89.28.
Gold advanced as hopes for a U.S. budget compromise and a tentative euro zone plan to fund debt-choked Greece for another two years tempered fears of a renewed global recession, fueling buying of bullion and other investments.
Spot gold jumped 1 percent to $1,731.05 an ounce by 2:37 p.m. CST (2037 GMT). U.S. gold gained 1.15 percent to $1,734.00 an ounce.
Three-month copper on the London Metal Exchange ended at $7,803 a tonne, up 2.6 percent from Friday's close of $7,605.
Other metals also rallied, with benchmark nickel touching its highest since the beginning of November and tin hitting their highest levels in nearly two weeks.
Slumping U.S. grain futures rose along with the broader commodities market in technical bounce from oversold conditions.
January soybeans at the Chicago Board of Trade gained 0.9 percent to $13.95-3/4 a bushel, December corn added 1.6 percent to $7.38-1/2 and December wheat rose 0.5 percent to $8.42.
The grain markets were due for a rebound after soybeans set a five-month low on Friday, erasing gains from the summer's devastating U.S. drought, and wheat fell to a four-month low.
In soft commodities, raw sugar futures surged more than 4 percent in the strongest single-day gain in nearly two months in a technical buying and speculative short-covering rally that offset fears about a growing global surplus.
March sugar in ICE settled 4.1 percent higher at 19.94 cents per pound. March white sugar on Liffe rose 3.18 percent to $525.50 per tonne.
Arabica coffee and cocoa futures were also firm, supported by the weaker dollar and gains in equities and commodities markets.