Oil posts biggest 3-day gain since 1998

NEW YORK/LONDON (Reuters) - Oil prices rose almost 7 percent on Friday to cap their biggest three-day rally in a decade on expectations a sweeping U.S. government bailout plan would boost liquidity across the battered financial markets.

U.S. crude jumped $6.67 to settle at $104.55 a barrel, bringing gains since Wednesday to 14.7 percent -- biggest three-day surge since December 1998, when the United States ramped up pressure on Iraq to allow arms inspections. London Brent rose $4.42 to $99.61.

"This is tracking the recovery we've seen in the capital markets across the board on the government bailout plan. The liquidity has come back in and it is pushing us higher," said John Kilduff, senior vice president at MF Global.

The U.S. government launched several multibillion-dollar programs to guarantee holdings in money-market mutual funds and curb short-selling of stocks while developing a broader plan to mop up toxic mortgage debt.

The moves came at the end of an agonizing week for Wall Street, in which investment bank Lehman Brothers LEH.N filed for bankruptcy, insurer AIG (AIG.N) was bailed out by the government and Merrill Lynch MER.N was forced to sell itself to Bank of America (BAC.N).

Investors had worried the confluence of crises severely threatened the stability of the U.S. economy -- a factor that helped push oil to a seven-month low of $90.51 a barrel earlier in the week.

Oil prices remain sharply down from their peak above $147 a barrel in mid-July, pressured by mounting evidence that high energy costs and economic troubles are undercutting global fuel consumption.

Oil prices also got a boost Friday from weakness in the U.S. dollar -- which strengthens overseas buying power in commodities -- and disruptions of supply from the hurricane-hit United States and from OPEC-member Nigeria.

"Traders will continue to alternate focus between the financial markets, which could result in further demand destruction, dollar movements as well as production out of the U.S. Gulf of Mexico," said Gerard Burg, a resource analyst at the National Australian Bank in Melbourne.

Some 89.2 percent of oil production in the U.S. Gulf of Mexico -- the source of one-quarter of U.S. crude output -- remained idled Thursday following Hurricane Ike, along with about 14 percent of the country's refined fuel capacity.

"The market had hoped we'd see a fairly quick rebound in production from Ike, but that hasn't materialized," Kilduff said.

U.S. Energy Secretary Sam Bodman told Reuters on Friday the White House would not ask the International Energy Agency for a release of emergency fuel stockpiles to deal with record low gasoline inventories.

Meanwhile, militants in Nigeria said they had attacked another oil pipeline in the Niger Delta.

The Movement for the Emancipation of the Niger Delta, which has declared an "oil war" against the oil sector and the military, said it used explosives to sabotage a Royal Dutch Shell-operated pipeline at the Cawthorne Channel in Rivers state.

(Additional reporting by Fayen Wong in Perth; Editing by Walter Bagley)