World oil prices bounced yesterday after Iraq said it could retaliate against crude-producing neighbour Kuwait if the US launched an attack from Kuwaiti territory.

US light crude was up 26 cents at $32.52 (€32.82) a barrel by late afternoon, after losing 99 US cents on Monday. London Brent blend added 34 US cents to $30.20 a barrel.

Iraqi deputy prime minister, Mr Tariq Aziz, told Canada's CBC television in an interview in Baghdad that Iraq might strike at Kuwait to defend itself against a US invasion.

"If there will be an attack from Kuwait I cannot say that we will not retaliate. We will of course retaliate against the American troops wherever they start their aggression on Iraq," said Mr Aziz.

Dealers were last night waiting for President George W. Bush's State of the Union address for further clues on the timing of any war effort.

"Some traders are looking at whether the threat of war has really subsided, and are taking positions in case the State of the Union address is really more aggressive than the previous rhetoric from Bush," said Mr John Hirjee, senior energy analyst, at Deutsche Bank in Melbourne.

Oil prices slumped on Monday after a report by UN chief weapons inspector, Mr Hans Blix, on Iraq fed hopes that war might be further away than had been feared.

Analysts say the threat of disruption to oil supply in Iraq comes as the market is already tight because of a strike in Venezuela that has severely disrupted the country's oil exports,

If the market loses Iraq's oil output of about two million barrels per day while Venezuela's exports are crimped, analysts say the OPEC oil cartel would struggle to make up the shortfall.