Both contracts fell around $2 on Wednesday after U.S. inventory data signaled a 2.1 million barrel increase in gasoline stocks, soothing worries about inadequate supplies for the approaching U.S. driving season.

But the government statistics did nothing to remove concern about the shut-in of around a quarter of OPEC producer Nigeria's production because of militant unrest and about the dispute between another OPEC member, Iran, and the West.

"The data was bearish, but what about Iran and Nigeria?" said Tony Machacek of Bache Financial. "There can only be a substantial downturn when there is a relaxation of these issues."

The United States, Britain and France on Wednesday pressed ahead with a U.N. Security Council resolution demanding that Iran curb its nuclear ambitions and said they would push for targeted sanctions if it did not.

The text, which is bound to be modified, does not call for sanctions but is tougher than expected. It threatens to consider "further measures as may be necessary," a veiled warning of sanctions the West wants if Iran defies council demands.

Russia, which has veto power in the council, made clear it would not support any sanctions but indicated it could back an initial resolution if it were modified.

President Bush in the past has not ruled out military options, but during talks in Washington on Wednesday with German Chancellor Angela Merkel he placed the emphasis on diplomacy.

INFLATION-ADJUSTED HIGHS

Fears that sanctions or even military action could lead to the disruption of Iranian crude supplies pushed U.S. crude to a record of $75.35 in April.

So far there is little sign that high prices are having a major impact on the world economy or denting consumption, though they are near to the inflation-adjusted highs that coincided with a sharp reduction in demand growth during the 1980s.

"Crude oil prices are now less than $20/barrel from the monthly peak of $89/barrel reached in November 1979," Barclays Capital wrote in a daily report.

Wednesday's U.S. government data indicated a softening in U.S. gasoline demand.

Gasoline demand growth typically runs at just below two percent per year, but Wednesday's data showed zero growth compared with a year ago, suggesting U.S. drivers might be changing their habits to take the sting out of near-record retail gasoline prices.