Oil prices soared on Wednesday after Britain froze ties with Iran, the world's fourth largest producer of crude, in response to the Islamic country's refusal to release 15 British sailors.
The price of Brent North Sea crude for May delivery leapt 1.24 dollars to 65.84 dollars a barrel in electronic trading.
Overnight, Brent crude had surged as high as 69.00 dollars -- last seen on September 4, 2006 -- on rumours of military conflict in Iran.
The rumours proved to be unsubstantiated, leading to heavy profit-taking before the close of Tuesday's trade.
On Wednesday New York's main oil futures contract, light sweet crude for delivery in May, jumped 1.32 dollars to 64.25 dollars in pit deals.
Analysts have said that Iran might decide to disrupt exports if tensions with the West escalate.
As well as its standoff with Britain over detained sailors, Iran refuses to bow to international pressure over its disputed nuclear programme.
"The overriding factor today is still the Iranian situation," said Daiwa Securities analyst Mark Pervan.
"It's a lot of 'just in case' buying at this stage."
Britain announced Wednesday a freeze on all official ties with Iran over the Islamic state's detention of sailors and marines in the Gulf.
A British servicewoman detained along with 14 other sailors will be released "within a day or two", Iranian foreign ministry spokesman Mohammad Ali Hosseini told AFP on Wednesday.
British Foreign Secretary Margaret Beckett announced the freezing of ties shortly after Prime Minister Tony Blair vowed to increase pressure on Tehran, which he said faced "total isolation."
"We are now in a new phase of diplomatic activity .... We need to focus all our bilateral efforts during this phase on the resolution of this issue," Beckett said.
Iran insisted Wednesday that the personnel it detained last week were in Iranian waters, but said it was "confident" London and Tehran can resolve the standoff.
The statement came minutes after British military officials unveiled documentary evidence they said showed the Britons were 1.7 nautical miles (3.15 kilometres) inside Iraqi waters when they were detained.
"Tensions between Iran and the West have been running high (also) because of Tehran's continuing refusal to halt nuclear enrichment despite more sanctions from the UN over the weekend," Sucden analyst Michael Davies said.
He added: "The tension is a concern to the market, with many market participants worried that Iran could halt its oil output if backed into a corner."
Aside from Iran, dealers awaited publication of the US Department of Energy's weekly update on American energy inventories later Wednesday, with the report expected to show further falls in gasoline (petrol) reserves.
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