NEW YORK, N.Y. - Oil prices have climbed to the highest level since May on concerns that Iran will cut off more oil to Europe.

Benchmark West Texas Intermediate crude rose by $2.60, or 2.5 per cent, to end the day at US$105.84 a barrel on the New York Mercantile Exchange. That's the highest price for oil since May 4.

Brent crude, used to price oil varieties imported by U.S. refineries, rose by $1.61 to finish at US$121.66 in London.

"People are just scared about Iran," independent analyst and trader Stephen Schork said. "They're concerned about supply."

The rise in gasoline is expected to be a drag on the recovering U.S. economy and could make gasoline and other fuels more expensive if prices stay high.

The rise in oil follows an announcement by Iran on the weekend that it will stop selling oil to Britain and France in retaliation for a planned European oil embargo this summer. The move was mainly symbolic — Britain and France import almost no oil from Iran — but it raised concerns that Iran could take the same hard line with other European nations that use more Iranian crude.

The European Union buys about 18 per cent of Iran's oil exports, though most of that comes from sales to just two countries: Italy and Spain.

Iran's Foreign Ministry also said Tuesday that visiting inspectors won't be able to inspect the country's nuclear facilities. An International Atomic Energy Agency team arrived in Tehran this week hoping to monitor Iran's nuclear program. Instead it will only hold talks with officials about ways to co-operate in the future.

"Some were hopeful that we were stepping back from the brink" of a protracted conflict in the region, PFGBest analyst Phil Flynn said. "But if they're not going to be able to inspect, then what's the point of being there?"

Iran has been embroiled in a standoff with the U.S. and Europe for several months over its nuclear program. Western countries say they fear Iran is building a nuclear weapon and have been trying to put financial pressure on the country to abandon the program.

The European Union has frozen assets of Iran's central bank, and it plans to stop buying Iranian oil after July. If Iran stops selling oil to some European countries ahead of the embargo, refineries will have to find alternative sources of oil sooner than planned.

A scramble for alternate oil sources would temporarily boost oil demand and prices, analysts said.

"We have every reason to expect to see prices advance on this latest Iranian news," Cameron Hanover analyst Peter Beutel said.

On Tuesday oil prices also were supported by Europe's approval of a US$170-billion lifeline to Greece. The decision, which includes an agreement by Greece to cut spending, raised hopes that Europe will contain a banking crisis that has hurt its economy and weakened energy demand.

So far this year, benchmark oil has risen seven per cent.

In other energy trading, heating oil rose by five cents to end at US$3.24 a U.S. gallon and gasoline futures rose by five cents to finish at US$3.07 a gallon. Natural gas futures fell six cents to end at US$2.63 per 1,000 cubic feet.

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