World oil prices fell three percent on Tuesday after Iraq agreed to allow United Nations weapons inspectors to return and said the pretext for a U.S. attack was thwarted.

The offer reduced the threat of imminent action against the Gulf oil exporter, which traders fear could disrupt shipments from a region that supplies a quarter of world oil. International benchmark Brent crude oil fell 72 cents to $27.80 a barrel by late afternoon in London, having touched a year-high above $29 last week. U.S. light crude slid 82 cents to $28.85 a barrel, some $2.50 off its recent peak.

"Iraq's offer has taken some of the war premium out of the market," said Nauman Barakat, a trader at Fimat International Banque.

Prices fell as much as five percent immediately Iraq made the offer late on Monday night, but markets rebounded slightly when the United States dismissed the move as a "tactic that will fail."

Washington, which is seeking to overthrow President Saddam Hussein, vowed to work for a tough new U.N. Security Council resolution forcing the country to disarm.

Iraq said all the reasons for a U.S. attack had been eliminated, and Security Council member Russia welcomed the move as an important step toward a peaceful resolution.

London's Center for Global Energy Studies said the war premium would slowly evaporate if Iraq went ahead with its offer "until the inspections program breaks down again, as it almost inevitably will."

Pressure Off OPEC

David Thurtell, commodities strategist at Commonwealth Bank in Sydney, said he was still not ruling out a U.S. attack on Baghdad.

But the offer greatly reduced the chances that OPEC exporters, which meet on Thursday in Japan, would relax price-boosting output curbs, he added.

Price hawks in the Organization of the Petroleum Exporting Countries like Venezuela are pushing for quotas to stay at their lowest level in a decade to defend prices.

OPEC Secretary-General Alvaro Silva said the balance of supply and demand would determine OPEC policy, which, in his opinion, meant there was no need for more oil.

Despite Tuesday's fall, the cost of a barrel remains 40 percent above the price at the start of the year.

Energy costs remain uncomfortably high for oil importing nations, worried about their impact on the recovery.

But many in OPEC blame the rally on war drums in the United States. Venezuela recently estimated that the war talk added $4 to the price of a barrel.

President Bush has stepped up a campaign this year for the removal of Saddam, who he says is trying to build weapons of mass destruction.

U.N. weapons inspectors left Iraq in December 1998 just before a U.S.-British bombing blitz designed to punish Baghdad for its failure to cooperate.