Oil markets were further unnerved as Washington set the weekend as a deadline for key crude producer Iran to reply to an international offer of incentives for a freeze in its nuclear drive.

During a visit to Washington, Mofaz warned that Iran was playing for time in dealing with the world community and was heading for a "major breakthrough" in its nuclear capability.

Israel and Washington fear Iran is seeking to develop a nuclear bomb, but Tehran denies this, saying its nuclear program is peaceful.

Washington warned of new sanctions if Tehran rejects the international package.

"We expect a response this weekend," Gonzalo Gallegos, a State Department spokesman, told AFP without specifying Saturday or Sunday.

New York's main contract, light sweet crude for September delivery, leapt as high as 128.60 dollars per barrel, before retreating to close at 125.10 dollars, marking a gain of 1.02 dollars from Thursday's finish.

In London, Brent North Sea crude for September delivery soared as high as 127.94 on Friday. It subsequently settled up 20 cents at 124.18 dollars.

Iran is the world's fourth-largest crude oil producer and tension over its nuclear program helped push crude prices to record highs above 147 dollars a barrel on July 11.

Iranian Foreign Minister Manouchehr Mottaki said Thursday there was no deadline and that his country had already replied. The US State Department had been vague about the deadline but narrowed it down on Friday.

A diplomatic source in Brussels said an Iranian response could come in the next few days but insisted that the international community wanted an answer from Iran.

Oil prices had tumbled on Thursday and earlier Friday amid concerns about US economic growth.

"Sentiment is more focused on slowing demand rather than short-term supply disruptions," said Mark Pervan, a senior commodities strategist with ANZ Bank.

The US Commerce Department reported Thursday that the American economy grew an annualized 1.9 percent in the second quarter, missing the 2.3 percent growth expected by most forecasts.

It also revised 2007 fourth-quarter growth to a 0.2 percent contraction -- the first reversal for the US economy since the 2001 recession.

"It confirms the slowing US demand story," Pervan added.

Oil prices began the week higher, rallying on Monday after militants attacked a Royal Dutch Shell pipeline in Nigeria, leading the Anglo-Dutch energy giant to reduce output.

Shell was forced to declare a "force majeure" -- a legal clause allowing producers to miss contracted deliveries because of circumstances beyond their control -- for the remainder of July, August and September, for exports from its Bonny terminal.

The past two years have seen an upsurge in violent attacks by armed gangs in the Niger Delta, cutting Nigeria's output of 2.6 million barrels per day of crude by a quarter.

The market reversed direction on Tuesday, but prices rebounded by more than four dollars Wednesday on news of an unexpectedly sharp decline in US motor fuel stockpiles.

The US government's Department of Energy said that gasoline or petrol inventories dropped by 3.5 million barrels in the week ending July 25, overturning market forecasts for a gain of 400,000 barrels.

The news came amid the so-called US driving season -- when many Americans hit the roads for their summer holidays pushing up demand for motor fuel.

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