london (reuters)

Oil climbed to US$63 a barrel on Monday, setting a 2007 record, on growing tension between Iran and the West over Tehran's nuclear work and its capture last week of British servicemen.

The latest developments between Tehran and the West, while not affecting oil shipments, are adding a premium to prices over threats to supply, analysts said. Iran exports about 2.2 million barrels per day of oil.

"Perhaps a couple of dollars of risk premium has returned," said Mike Wittner of investment bank Calyon. "Prices have ticked up, but I think as the market digests the news, other things being equal the Iran risk premium will start to fade again."

U.S. crude hit a three-month high of US$63.30 a barrel and was up 75 cents at US$63.03 at 1403 GMT. Brent crude gained $1.12 at US$64.30.

Limit cooperation

Iran said on Sunday it would limit cooperation with the U.N.'s nuclear watchdog and resolved not to halt its atomic work after the security council voted to impose new sanctions. Oil rose on Friday after Iran seized 15 British naval personnel in the Gulf.

"The incident with the UK sailors is not a direct concern for oil supplies but it serves as a wake-up call," said Olivier Jakob, analyst at Petromatrix.

Iran is the world's fourth-largest oil exporter. Countries in the Middle East pump more than a fifth of the world's daily oil production of some 85 million bpd.

While driving oil up, the rising diplomatic tension over Iran looked to have little impact on other markets where easing expectations of a U.S. interest rate cut dominated.

Euro zone government debt prices fell and the dollar consolidated gains. European shares were little changed after last week's rally.

MUCH TOO HIGH

The head of the International Energy Agency, an adviser to 26 industrialised countries, said of oil's rise on Monday that prices are too high and producers should increase output.

"The current price is much too high and OPEC should raise production but consuming countries also have to cut consumption," IEA Executive Director Claude Mandil told Reuters.

Oil surged to a record high of $78.40 last July on concern that the conflict between Israel and Hezbollah guerrillas could escalate and spread to more Middle East countries.

With tensions on the increase, prices are likely to remain well supported, analysts say.

"The situation in the Middle East has become much more uncertain and the risk of tensions intensifying has underpinned the rise in oil prices and will continue to support prices," said David Moore, an analyst at Commonwealth Bank of Australia.

Oil is up about 26 per cent since U.S. crude hit a 20-month low of $49.90 in mid-January, boosted by falling gasoline inventories in top consumer the United States ahead of peak demand in the summer.