UPDATE 10-U.S. oil jumps $2 on jet crash, new Russia sanctions
* Malaysian airliner downed over eastern Ukraine
* U.S. sanctions on Russia add risk premium to crude
* Crude draw, export expectations create tight U.S. picture (Adds background on U.S. crude)
SAN FRANCISCO, July 17 (Reuters) - U.S. crude oil jumped by more than $2 on Thursday after a Malaysian airliner was shot down over eastern Ukraine, dramatically escalating the crisis between Russia and the West one day after the U.S. ratcheted up sanctions against Moscow.
Oil prices began rising early, extending their rebound from a weeks-long decline as new U.S. sanctions announced on Wednesday took aim at some of Russia's biggest companies for the first time, including Rosneft, the largest oil producer.
Gains accelerated over the afternoon as news spread of a Malaysian airliner crash in eastern Ukraine, where government forces are fighting pro-Moscow rebels. U.S. Vice President Joseph Biden said the jet was "blown out of the sky" and Ukraine accused "terrorists" of shooting it down.
Gold also jumped $20 and grain and palladium prices rallied as traders either rushed for safer financial havens or hedged against possible supply disruptions from the region. Russia pumps more than a tenth of the world's crude.
"The concerns are that Russia could do tit-for-tat. They could get angry and cut off oil or natural gas supplies or palladium supplies. Then all of a sudden we have shortages," said Phil Flynn, an analyst at Price Futures Group in Chicago, Illinois.
U.S. crude rose for a second straight session, settling up $1.99 at $103.19 per barrel, its strongest showing since mid-June and its largest two-day rise since December 2013. U.S. crude had lost nearly $9 since it fell from a June 20 high of $107.73 to $99.01 on July 15, before resuming its rise.
Brent for September, which became the front-month contract on Thursday, rose by 72 cents to settle at $107.89.
On Wednesday, U.S. crude gained $1.24 after government data showed rising U.S. refining activity caused crude stocks to fall by 7.5 million barrels last week, the biggest draw since January and larger than the 2.1 million barrel drawdown forecast by analysts.
Oil prices have been in a downward trend since Brent hit a nine-month high of $115.71 on June 19 after Islamist insurgents took control of swathes of northern and eastern Iraq.
Fighting has continued, but initial fears it would have a large impact on the country's oil exports have eased, prompting selling by hedge funds who had built up a record long bullish position. Iraq's southern oilfields are set to export 2.6 million barrels per day (bpd) in July, the same as May and the highest since 2003.
While supplies from Libya also appeared set to improve with the reopening of key ports, renewed violence this week and the slow ramp-up of exports has lent a measure of support to Brent.
Libya, which exports oil through its two largest eastern ports, is capable of shipping 500,000 bpd, but will not start exports before August, an official said on Wednesday. (Additional reporting by Lin Noueihed in London, Keith Wallis in Singapore; Editing by Alden Bentley and Bernadette Baum)