Oil fell on Monday as a truce took effect to end fighting between Israel and Hezbollah, easing concern about supply from a region that pumps a third of the world's oil.

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Prices also slipped as BP (BP) said it would keep half its Prudhoe Bay oilfield, the largest in North America, pumping while it carries out pipeline repairs instead of shutting down the entire field.

"These developments, one on the geopolitical side and one on the actual supply side, both remove a bit of support for prices," said Mike Wittner of investment bank Calyon. "The price action so far is understandable."

U.S. crude settled 82 cents weaker at $73.53 after dropping to $72.60, the lowest since July 20. London Brent lost $1.33 to trade at $74.30.

Prices fell 41 cents in New York last week, pressured by an alleged aircraft bomb plot that raised fears of a cut in air travel and supported by BP's move to shut Prudhoe Bay in Alaska.

Heavy fighting in southern Lebanon stopped abruptly on Monday after a U.N.-brokered truce came into effect, but the shooting of two Hezbollah guerrillas by Israeli soldiers underlined the fragility of the calm.

Security sources in south Lebanon said Israeli air strikes and artillery fire continued until just a few minutes before the truce took effect at 0500 GMT.

Oil traders fear that a prolonged war could draw in regional producers such as Syria or Iran, both supporters of Hezbollah.

MAY FALL FURTHER

Brent has dropped from a record high of $78.65 hit last week and prices may have further to fall for now, dealers said.

"We're not talking about them collapsing," said Christopher Bellew, a broker at Bache Financial. "There's no reason why prices shouldn't come down to $71 or $72 or $70, talking about Brent."

Contributing to oil's drop, BP said at the weekend it had decided to keep pumping oil from the western half of Prudhoe Bay since pipeline corrosion in the west was less severe.

As of Saturday it was pumping about 150,000 barrels per day (bpd) from Prudhoe Bay and expected to ramp up output to 200,000 bpd — half of full capacity — after it completes maintenance.

"The sting in that event is obviously less than it was," said Tobin Gorey, commodity strategist at Commonwealth Bank of Australia.

U.S. pipeline regulators gave BP clearance to use the western lines Thursday, raising hopes that U.S. West Coast refiners would be less strained over the last month of the driving season.

The other half of Prudhoe Bay is expected to be offline for months, possibly until early next year. BP said Monday it does not yet have a timetable for restarting the eastern half.

Oil is up almost 20 percent this year as Nigerian militants earlier cut about a quarter of the country's supplies. Fellow OPEC member Iran's row with the West over its nuclear work has also kept dealers on edge over a wider outage.

Royal Dutch Shell last week restored 180,000 bpd of Bonny Light crude production in Nigeria after a pipeline leak, but more than 400,000 bpd — shut since February — remained offline.

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