Brent crude jumped to $111 a barrel on Thursday as fighting in the Gaza Strip sparked worries an escalation could ultimately disrupt oil supplies from the Middle East.
Hamas fired dozens of rockets into southern Israel, killing three, and Israel launched numerous air strikes across the Gaza Strip as the military showdown lurched closer to all-out war.
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Oil rose as Egyptian President Mohamed Mursi said Israel's attacks on the Gaza Strip were "unacceptable" and would lead to instability in the region.
Hamas is an offshoot of the Muslim Brotherhood which now controls Egypt, Israel's most powerful Arab neighbour and a crucial partner in the 1979 peace treaty that stands between fragile stability and regional chaos.
The fighting raises fears for the security of fuel supplies from the Middle East, which produces a third of the world's oil.
Brent crude rose $1.39 to $111.00 a barrel before slipping back to $110.77 at 1245 GMT. U.S. oil was up 18 cents at $86.50, after ending 94 cents up on Wednesday.
"I have a hard time seeing (prices) falling back much at the moment, at least while tension is still high," said Filip Petersson, an analyst at SEB in Stockholm.
"We would probably need to hear some kind of statements that indicate the Israelis are stepping down, but I think that's unlikely to happen at the moment."
A Hamas rocket killed three Israelis north of Gaza on Thursday, the first Israeli fatalities of the latest conflict in the coastal region.
Israel on Wednesday assassinated the top Hamas military commander, Ahmed Al-Jaabari, and shelled the enclave from land, sea and air, killing 13 people and wounding more than 100.
"The Israelis must realise that this aggression is unacceptable and would only lead to instability in the region and would negatively and greatly impact the security of the region," Mursi said in a televised address to Egypt on Thursday.
Oil price gains were limited, however, by data showing the euro zone debt crisis had weighed on the currency bloc's economic activity in the third quarter and by persistent fiscal worries in the United States.
Economic data showed the 17-nation euro zone had slipped into its second recession since 2009 in the July-September period as the three-year debt crisis slowed growth in Germany.
Euro zone gross domestic product (GDP) slipped 0.1 percent in the third quarter of 2012 from the previous three months, while growth in Germany, Europe's largest economy, cooled to 0.2 percent.
Investors are worried that a package of tax increases and spending cuts mandated to come into force in the United States next year if a deal is not agreed - the so-called "fiscal cliff" - will tip the world's biggest economy and top oil consumer back into recession.
"The overall economy is weak, but prices are biased to rise because geopolitical risks are going up," said Tony Nunan, a risk manager at Mitsubishi Corp. "That's going to be the story for the rest of the year - a weak economic outlook but higher prices because of supply worries."
Data due later in the day from the federal Energy Information Administration (EIA) on U.S. crude and product stockpiles will provide more direction to prices.