The news prompted a frenzy of buying by traders who already feared a halt in shipments from the world's No. 4 crude exporter Venezuela.
International benchmark Brent crude oil jumped $1.01 to $27.00 per barrel by midday in London, resuming an assault on a six-month high of $28.15 seen last week.
U.S. crude futures rose 73 cents to $26.94.
Iraqi leader Saddam Hussein said all oil exports were suspended from Monday for a month or until Israel withdrew unconditionally.
Israeli Prime Minister Ariel Sharon vowed to press ahead with its sweeping military offensive in defiance of U.S. demands for a withdrawal.
OPEC Secretary-General Ali Rodriguez said he will consult with cartel oil ministers on Tuesday and the group could hold an emergency meeting to decide policy.
Sanctions-bound Iraq is the sixth largest oil supplier to the United States, and ships four percent of world exports. Saddam has already called on other Arab producers to embargo the West for its support of Israel, and Libya has backed the call.
Fellow Gulf oil exporter Iran has said a total blockade by all Islamic states would be very a effective weapon, and supreme leader Ayatollah Ali Khamenei called on Friday for Arab states to launch a one month embargo on the West.
The world's No.1 exporter Saudi Arabia has said it had ample capacity to respond to any major disruption.
Industrialized countries fear high oil prices could damage the nascent economic recovery.
VENEZUELAN CONFUSION
Industry sources said Venezuelan oil loadings were halted at the weekend and oilfield output was already down by half, although the Venezuelan leader insisted on Sunday that production and exports were normal.
Venezuelan state oil company executives are protesting against the government's choice of a new board of directors.
Oil market traders said as many as 25 empty oil tankers were at Venezuelan ports waiting to load on Sunday, and one source said production was already cut by 60 percent.
Venezuela supplies about 15 percent of U.S. oil imports. Latest U.S. government data shows it accounted for about 1.4 million barrels per day of crude imports and another 300,000 bpd of products such as gasoline and diesel.
President Hugo Chavez announced the sacking of seven dissidents from the state oil company on Sunday, labeling them "saboteurs."
The Organization of the Petroleum Exporting Countries has cut production by five million bpd since January 2001 to buoy prices, and in March agreed to extend output restrictions until at least its next meeting in June.
Russia and Norway, which both agreed to join OPEC in crude supply curbs, said on Monday it was too early to reconsider the policy now. [End]