Oil prices rose sharply on Thursday, breaking over $67 a barrel on worries over gasoline supplies ahead of the summer driving season.

Oil dealers were also closely watching a simmering dispute between OPEC-member Iran and the West, after Tehran rejected a U.N. demand that it halt uranium enrichment.

U.S. crude rose 60 cents to $67.05 a barrel at 1900 GMT, tracking a surge in gasoline futures to a five-month high over $2 a gallon. London Brent crude was up $1.22 at $66.77 a barrel.

Concerns over gasoline inventories in the United States were reignited on Wednesday when a government report showed the biggest weekly decline in stockpiles since 2003.

The U.S. oil industry is in the process of switching from the water-polluting gasoline additive MTBE to ethanol, which analysts say could trigger price spikes and regional supply disruptions.

"The market is reacting to worries over supplies during the coming driving season," said Addison Armstrong, manager for exchange traded markets at TFS Energy in Stamford, Connecticut.

Rising tensions with Iran, the world's fourth largest oil exporter, added support to prices, dealers said.

The U.N. Security Council unanimously adopted a "presidential statement" late on Wednesday calling on Iran to freeze its uranium enrichment work.

But as the five permanent Security Council members and Germany met in Berlin to discuss their next step on Thursday, Iran's ambassador to the U.N. atomic agency ruled out complying.

Oil traders are worried the dispute could result in a disruption of crude shipments from Iran.

NEARING THE RECORD

Oil prices are about $4 below the record $70.85 hit last year after hurricanes knocked out a quarter of U.S. energy production. They have climbed from below $20 in a four-year rally driven by fast-growing Chinese demand.

Supply disruptions in Nigeria and Iraq this year have helped to keep prices buoyed above $60.

But the supply outages are being covered by other producers, relieving the International Energy Agency of the need to order an emergency oil release.

"It might be a supply disruption for Nigeria, but it has been offset by other producers...and the IEA will certainly not intervene," IEA chief Claude Mandil told Reuters on Thursday. "Strategic stocks are not for combating high oil prices. It is important for markets to deal with supply disruptions."

Nigerian oil output has been cut by a quarter due to violence in the Niger Delta.

Some of the lost production struggled back on Thursday when Italy's Agip lifted a force majeure on exports from its Brass terminal after repairing a sabotaged pipeline.

Analysts Goldman Sachs stuck to their forecast that U.S. WTI crude would average $69.50 a barrel over the rest of 2006. They noted world economic growth was on a firm footing.

"Although Goldman Sachs economists expect a slowdown in the U.S. economy in the second half of 2006, the continuing recoveries in Europe and Japan, combined with strong growth in China, should make global growth more balanced, and more sustainable into 2007," they wrote in a research note.