Oil rises $2 on Israel and weak dollar

By Edward McAllister

NEW YORK (Reuters) - Oil prices rose more than $2 on Monday amid concern that Israeli attacks on Hamas could disrupt Middle East crude oil supplies and as the dollar weakened.

U.S. light, sweet crude settled up $2.31 at $40.02 a barrel, below earlier highs above $42, with thin post-holiday trade making for a volatile day in the market.

London Brent crude settled up $2.18 at $40.55 a barrel, after touching a session high of $43.18.

Oil is on track for a nearly 60 percent loss this year, the biggest annual fall since futures began trading 25 years ago.

Israeli aircraft attacked Hamas targets in Gaza on the third day of an offensive that has killed more than 300 Palestinians, many of them civilians. [nLT345484]

The attacks enraged Arabs across the Middle East, raising concerns that the conflict could threaten oil supplies from the region.

"Certainly, oil prices remain sensitive to geopolitical developments, especially those emanating from that part of the world, but the declining dollar, low volume and the return of bargain-hunting Europeans are probably more to blame," Mike Fitzpatrick, vice president at MF Global, said in a report.

The dollar fell broadly on Monday, eroded by a grim outlook for the U.S. economy. Dollar weakness can increase the investment appeal of oil and other commodities.