Oil rises after dive on financial turmoil

By Alex Lawler

LONDON (Reuters) - Oil rose towards $98 a barrel on Tuesday, rebounding after a near 10 percent drop in the previous session in response to the rejection by U.S. lawmakers of a financial sector rescue plan.

Fears of a major meltdown following historic Wall Street losses eased as European stocks .FTEU3 firmed slightly on Tuesday, suggesting some belief that markets fell too far in Monday's selloff.

"We've been moving in tandem with how the equity markets have performed," said Rob Laughlin of MF Global. "In terms of the rally today, I think things were overdone last night across many markets, including energy."

"I'm not suggesting the panic is over, but I am suggesting the scare tactics in some quarters have proven to be rather overdone."

U.S. crude was up $1.10 at $97.47 a barrel by 11:15 a.m., after losing $10.52 on Monday to $96.37 -- the second biggest fall since April 23, 2003. London Brent crude rose $1.42 to $95.40.

Concern over the financial sector continued, nonetheless, with Belgian-French financial services group Dexia (DEXI.BR) getting a 6.4 billion euro (5 billion pound) capital boost from public shareholders.

Ireland offered to guarantee all bank deposits for two years to improve banks' access to funds on international markets, helping sentiment in equity market.

On Monday, the U.S. House of Representatives voted 228 to 205 against a bailout plan that would have allowed the Treasury to buy up toxic assets from banks. The shock rejection of the plan sent stock markets sliding.