July futures for light, sweet crude fell $4.19 to settle at $134.35 a barrel in volatile trading on the New York Mercantile Exchange on Monday.

 

On Friday, oil prices had hit a record $139 a barrel after jumping nearly $11 in a single-day record.

 

The sharp hike had come after the European central bank announced a possible increase in interest rates in July to counter rising inflation, a move that sent the dollar falling against the euro.

 

Stronger dollar

 

But Paulson's comments on the US treasury's possible intervention helped the dollar strengthen against the euro on Monday, sending oil lower.

 

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Many investors buy commodities such as oil as a hedge against inflation when the greenback weakens.

 

But on Monday, the effect reversed. The dollar gained ground, making oil less effective as an inflation hedge.

 

Also, a stronger dollar makes oil more expensive to investors overseas.

 

Another factor that underpinned Friday's rally was an Israeli cabinet minister's comment that his nation might attack Iran if it did not halt its nuclear programme.

 

But that prospect appeared to dissipate over the weekend as Israel's prime minister, Ehud Olmert, distanced himself from the comments and other officials noted that the minister had not been expressing official government policy.

 

Some analysts, however, see warning signs in Friday's bold oil price jump.

 

"It was a freakish oil market Friday as the market's worst fears – some real and some imagined – exploded into a rhapsody of wild buying," said Phil Flynn, an analyst at Chicago-based Alaron Trading Corp, in a research note.