Crude oil prices fell for the third straight day on Wednesday, briefly dipping below $72 a barrel after a surprising increase in U.S. gasoline supplies.

Analysts said selling also was spurred by the rising belief in the market that the conflict in Israel and Lebanon would not spread and thus threaten Middle East oil supplies.

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Federal Reserve Chairman Ben Bernanke's latest assessment of a slowing economy may also have played a role, by implying that demand could weaken.

Oil futures have plunged more than 5 percent since settling at a record above $77 a barrel on Friday.

"Markets initially priced in an expectation that this would become a broader regional conflict and interrupt Iranian supplies," said Jason Schenker, an economist at Wachovia Corp. Iran, a financial backer of Hezbollah, is OPEC's No. 2 supplier.

Schenker said markets were also responding to Energy Department data that showed U.S. gasoline inventories above year-ago levels for the first time since late March. "We've got some lush supplies," he said.

Light sweet crude for August delivery tumbled as low as $71.65 a barrel on the New York Mercantile Exchange, before settling at $72.66, a decline of 88 cents. Gasoline futures declined by 3.72 cents to settle at $2.2298 a gallon, while heating oil futures finished 1.83 cent lower at $1.9651 a gallon.

Fears in the market that the crisis could escalate and possibly draw Iran into the conflict lifted oil prices to an intraday record of $78.40 a barrel on July 14 before settling at a record $77.03.

September Brent crude futures on London's ICE Futures exchange declined 46 cents to settle at $73.90 a barrel.

In its weekly inventory report, the Energy Department said gasoline inventories grew by 1.5 million barrels last week to 214.2 million barrels, or close to 1 percent above year ago levels.

The increase in supplies came as refineries cranked up their production, pumping out gasoline, diesel and other fuels at 93 percent of their total capacity to meet growing demand. Over the past four weeks, gasoline demand in the U.S. averaged almost 9.6 million barrels per day, or 1.9 percent greater than last year.

But oil prices began to fall even before the U.S. data was released.

"The profit-taking was initiated after (U.S. Secretary of State) Condoleezza Rice seemed to point to the U.S. favoring a cease-fire," said Paul J. Harris, analyst at Bank of Ireland Global Markets in Dublin.

Rice said that any cease-fire should be based on fundamental changes that would have a lasting impact on the region.

"We all want a cessation of violence. We all want the protection of civilians. We have to make certain that anything that we do is going to be of lasting value," she said.

On Wednesday, Israeli warplanes flattened houses in south Lebanon and Israeli troops clashed with Hezbollah guerrillas on the Lebanese side of the border. Lebanon's prime minister reported a death toll of 300 as fighting entered its second week.

Hezbollah rockets made their first hit near Christian holy sites in Israel: Two rockets hit Nazareth — the biblical hometown of Jesus — killing two brothers ages 3 and 9, bringing the Israeli death toll to 29.

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