U.S. oil prices fell sharply on Friday as the Bush Administration moved to defuse Middle East tensions, softening fears of a wider war that could disrupt the region's huge oil flows. 

Crude oil prices on the New York Mercantile Exchange (NYMEX) fell 88 cents to $25.70 a barrel for May delivery, extending the last two days of losses, despite a call from Iran for Arab states to halt oil shipments to the West. 

The losses bring oil down from a six-month high of $28.35 a barrel reached Thursday, when violence between Israel and the Palestinians escalated in the West Bank and tensions simmered on Israel's border with Lebanon. 

Bush on Thursday afternoon called for a withdrawal of Israeli forces from the West Bank after the week-long military onslaught and said Secretary of State Colin Powell would go to the region to revive peace talks. 

"Understandably, after the recent increase in violence and tensions in the Middle East, the markets took Bush's speech and the ensuing diplomatic pressure as an opportunity for a much-overdue correction," said Lawrence Eagles of GNI in London. 

"This week's inexorable move higher was the result of the tremendous uncertainty and the President sending in Powell lessens that uncertainty," said a New York analyst. 

Oil dealers shrugged a call from Iran's supreme leader Ayatollah Ali Khamenei Friday for Arab states to launch a "symbolic" one-month oil embargo against Western countries to pressure them to stop supporting Israel. 

"Arab governments can use oil as a weapon. They can cut off the flow of oil to all the countries which have good ties with Israel," Khamenei said in a sermon during the Muslim prayers in Tehran. 

Leading Arab oil exporters Saudi Arabia and Kuwait have both rejected the idea of an embargo, first raised by Iraq on Monday. Non-Arab Iran, the world's second largest crude oil producer, has tried to cultivate closer ties with fellow OPEC members in order to boost its position in the cartel and assure stronger prices. 

OPEC Secretary-General Ali Rodriguez said on Friday that OPEC oil exporters are not planning to release any extra crude supply onto world markets this year even though prices have jumped by a third in six weeks. 

"My opinion is that there should be no increase in production if prices rise due to speculation. If there is demand growth and the market needs more oil, of course we should do so," he told Reuters from OPEC's Vienna headquarters. 

OPEC has cut production repeatedly in the past year to buoy prices, and most recently decided to extend output restrictions until at least its next meeting in June. 

NYMEX May gasolines prices fell 2.78 cents to 79.55 cents a gallon, while May heating oil fell 2.06 cents to 66.60 cents a gallon.