Oil prices spiked close to eight-month highs on Wednesday as the EU moved closer to an Iran oil embargo and Tehran warned the US to remove its naval forces from the Gulf.
Stepped-up rhetoric sent shivers through the markets worried that Iran might follow through on threats to disrupt shipping of Gulf oil through the crucial Hormuz Strait.
New York's main contract, West Texas Intermediate (WTI) for delivery in February, jumped during trade to $103.74, a level last touched on May 11. The contract fell back to $103.22, down 26 cents from Tuesday's closing level.
In London Brent North Sea crude for February rose to $113.97 per barrel, its highest level since November 14. It later stood at $113.70, up $1.57 from Tuesday.
"The market is trying to digest concerns about Iran," said Jason Schenker of Prestige Economics.
"I don't think Iran is going to do anything. But... the potential impact would be so large that people have to price it in to the market."
On Wednesday Tehran renewed its warning to America against keeping a US naval presence in the oil-rich Gulf, adding to its ongoing threat to block Hormuz in reaction to Western sanctions.
"The presence of forces from beyond the (Gulf) region has no result but turbulence. We have said the presence of forces from beyond the region in the Persian Gulf is not needed and is harmful," Defence Minister Ahmad Vahidi said, according to state television's website.
The comments echoed a Tuesday warning that Iran would unleash its "full force" if a US carrier is redeployed to the Gulf.
"We don't have the intention of repeating our warning, and we warn only once," armed forces chief Brigadier General Ataollah Salehi said.
Meanwhile diplomats said the European Union was on target to impose an embargo on oil imports from Iran, to pressure the country to halt its alleged nuclear weapons program.
France said the embargo could come by the end of January.
"There is an agreement in principle to forge ahead" on the embargo, an EU diplomat told AFP.
The US also said that Treasury Secretary Timothy Geithner would head to China and Japan next week to discuss, among other things, Washington's desire to pressure Iran via sanctions on its central bank.