Oil prices fell back from near record highs on Monday on hopes that Israel may scale back its fighting against Lebanese guerrillas.
Some still fear the dispute will push oil prices up even further
Despite ongoing conflict, US light crude prices fell after reports on Israeli television said Israel could end its Lebanon offensive within days.
Following the news, US light crude ended down $1.73 to $75.30 a barrel.
The conflict in the Middle East has added to nervousness in an oil market already suffering supply jitters.
London's Brent crude finished down $1.66 to $75.92 a barrel, after touching a record $78.18 early in Monday trading.
Israel on Monday continued its attacks on Beirut and other targets across Lebanon, while missiles fired by Hezbollah militants again struck the Israeli city of Haifa.
And although the Israeli military quickly denied the media reports that it will soon end its offensive in Lebanon, they were enough to ease global oil prices.
It also came after UN chief Kofi Annan and UK PM Tony Blair called for an international force to be sent to Lebanon.
Although neither Lebanon nor Israel are major oil producers, some investors fear the conflict could quickly destabilise the wider Middle East region, one of the world's most important oil centres.
"The petroleum markets remain in a state of heightened alert for any fresh developments across the broader Middle East," said Tim Evans, an energy analyst at investment bank Citigroup.
"The Iranians seem to think that there is some potential for a cease-fire and prisoner exchange but it will be hard for both sides to hear that kind of proposal over the roar of missiles."
The situation in the Middle East has seen investors turning to gold as a safe-haven for their cash - pushing the spot price to a two-month high of $675 an ounce.
However, oil producers' body Opec has insisted the market is well supplied.