Oil prices hit their highest levels for more than two years on Tuesday after Chief U.N. weapons inspector Hans Blix said his teams in Iraq had uncovered smuggled materials, potentially strengthening the case for a U.S.-led war on Iraq.

However, Blix said that it was unclear whether the goods were linked to weapons of mass destruction.

London Brent crude futures were 60 cents firmer at $30.80 a barrel after earlier touching $31.25, their highest level since October 2000. U.S. light crude rose 39 cents to $32.65.

"The question is, is it a smoking gun?" commented Lawrence Eagles, analyst at GNI-Man Financial.

"Whether these discoveries or items are related to weapons of mass destruction is a matter which we still need to determine," Blix told the BBC in an interview.

Earlier on Tuesday, Brent had weakened, partly unravelling Monday's gains, on news that non-OPEC producer Mexico was increasing its production in line with a weekend decision by the Organization of the Petroleum Exporting Countries (OPEC) to raise official production by seven percent.

The output increase is designed to help compensate for the effects of a six-week old Venezuelan strike which has choked off the nation's exports.

However, many in the oil markets doubt whether the mostly Middle Eastern OPEC oil, which takes up to six weeks to reach the United States can make up for the Venezuelan shortfall.

Venezuelan oil takes only five days to reach the key U.S. market.

Traders were also sceptical whether talks, scheduled for Thursday, between U.N. Secretary-General Kofi Annan and Venezuelan President Hugo Chavez would go any way towards breaking the deadlock between Chavez and opposition leaders.

The United States is concerned that the loss of oil from the world's fifth largest exporter could aggravate the effects on the U.S. economy of a war against Iraq, which President Bush has threatened if Baghdad fails to disarm in line with U.N. Security Council resolutions.