Oil dropped more than $2 on Wednesday after a U.S. government report showed a surprise increase in gasoline inventories, easing worries about a supply crunch ahead of summer when demand peaks.

Gasoline stocks in the world's largest oil consumer rose by 2.1 million barrels last week, countering expectations of a drop, the Energy Information Administration (EIA) said.

It was the first increase in gasoline supplies since February, and raised some concerns that retail sticker shock at the U.S. gas pumps was causing Americans to tweak their driving habits.

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"I think high prices, without question, are starting to have an effect on demand," said Bill O'Grady, an analyst at A.G. Edwards in St. Louis.

U.S. light, sweet crude settled at $72.28 a barrel, down $2.33, or 3.1 percent, after hitting $74.99 earlier in the session, near the all-time high of $75.35 hit on April 24.

London's Brent gave up $1.99, or 2.7 percent, to settle at $72.65, after matching Tuesday's record of $74.97 earlier in the day.

The U.S. data showed gasoline demand held flat with year-ago levels of 9.13 million barrels per day, compared with normal demand growth just below 2 percent.

"There is evidence that American drivers are making some adjustments as a result of high prices," said Mark Routt, analyst at Energy Security Analysis Inc. "People are trimming discretionary travel, and choosing options other than driving to get places when they have that choice."

Despite the gasoline build, the EIA said strong demand, geopolitical tensions, and limited surplus oil production and refining capacity were likely to keep prices high through 2007.

IRAN TENSIONS

Prices rose earlier on Wednesday supported by mounting tension over Iran's nuclear program and a fresh surge of fund investment that also lifted gold to a 25-year high with help from a weak dollar, and sent platinum to a record.

U.S. Ambassador John Bolton said Wednesday that the United States, Britain and France were introducing a draft resolution to the full U.N. Security Council aimed at curbing Iran's nuclear ambitions.

The resolution would come under Chapter 7 of the U.N. Charter, which makes demands legally binding, he said.

Moscow and Beijing are reluctant to endorse anything that would be a step toward sanctions or even military action, although the draft will not threaten either measure.

The meeting at the United Nations comes as German Chancellor Angela Merkel arrives in Washington to discuss Iran strategy with President Bush.

German officials say she hopes to persuade Bush to take a methodical approach on Iran so as not to split the Western allies as happened with Iraq.

Iran on Tuesday threatened to attack Israel in response to any "evil" act by the United States.

The tension between Iran and the West comes as a quarter of OPEC member Nigeria's oil exports remain halted due to violence, while Bolivia's move to nationalize its energy industry has alarmed foreign investors.

Oil is likely to remain strong because of worries about exports from Iran, the world's fourth largest oil producer, supply losses in Nigeria and rising demand, investors said.

"It's a brave person that sells oil at the moment," said Ivor Pether, a fund manager at Royal London Asset Management. "The likelihood of a disruption in one or another area seems high, I would have thought."

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