Oil prices fell on Monday from two-year-highs set last week as international divisions gaped wide over whether to wage war on Iraq.

Sentiment also weakened after an OPEC source said the Organization of the Petroleum Exporting Countries would likely suspend output quotas and pump at will should war halt Iraqi crude supplies.

On London's International Petroleum Exchange (IPE), benchmark Brent crude fell 50 cents to $32.00 a barrel. The U.S. market was closed for Presidents' Day.

Traders said the market was weakening following the steep gains of last week, but that oil traders still believed war on Iraq was likely despite deep divisions in the international community and mass popular protests over the weekend against a U.S.-led attack.

"I think the market was overbought," said Christopher Bellew of Prudential Bache brokerage. "I think a war in the middle of March is still quite probable."

Fierce opposition to military action was demonstrated by a weekend of anti-war protests across the globe.

As the divisions rumbled on, European Union leaders gathered on Monday for an emergency summit on Iraq with most stressing war could only be a last resort and seeking more time for U.N. arms inspections.

EU diplomats have said a more positive assessment of Iraqi cooperation by U.N. weapons inspectors last Friday, together with support for France, which is leading calls for more time for the inspections, blunted a U.S.-British drive for an early U.N. resolution authorizing war.

French President Jacques Chirac said on Monday there was no need at present for such a resolution while arms inspections continued.

Arriving for the emergency EU summit, Chirac said: "We consider that war is always, always, the worst solution.

"That is our position which leads us to conclude that it is not necessary today to have a second resolution, which France could only oppose."

Traders fear a war could disrupt supplies from the oil-rich Middle East, although analysts believe that if military action were swift and decisive, prices could spike, then fall sharply.

On Monday, an OPEC source said the cartel would probably agree to suspend temporarily output limits and pump at will if an attack on Iraq halted exports from the world's eighth largest exporter.

"One or two countries could volunteer to make up for the loss of supplies should war start on Iraq, but they would need the blessing of other members," the source said, asking not to be named.

"It would be a temporary exemption, just as long as it takes to compensate for the loss and cool off the market," he added.

After any war, OPEC would return to its current ceiling of 24.5 million barrels per day, he added.

In the immediate term, supplies potentially face disruption from a strike over pay and conditions by senior Nigerian oil workers who supervise exports.

Government and oil company officials said on Monday the action was having no immediate impact on crude exports, but the oil workers union said blue-collar workers would join in the action and it expected export loadings to be affected.