* Oil jumps $3 a barrel before paring gains on dollar rebound
* Iran denounces strikes, Russia calls for “immediate ceasefire”
* Pakistan assures “strong response” if Saudi integrity undermined (New throughout, updates prices and market activity, adds milestones, analyst comment)
By Barani Krishnan
NEW YORK, March 26 (Reuters) - Oil jumped about 5 percent on Thursday, the biggest daily gain in a month, as air strikes in Yemen by Saudi Arabia and its Gulf Arab allies sparked fears that escalation of the Middle East battle could disrupt world crude supplies.
The Saudi military operation against the Iran-backed Houthi rebels, who have driven Yemen’s president from the capital Sanaa, has not affected oil facilities of major Gulf producers.
But fears the conflict could spread and disrupt Middle East shipments powered benchmark Brent oil to near $60 a barrel, in its biggest daily gain since Feb. 25.
U.S. West Texas Intermediate (WTI) crude soared above $50, approaching 2015 highs.
Some analysts said the chance of an all-out proxy war between the Saudis and Iran looked remote. They attributed some of Thursday’s rally in oil to short covering after steep losses in early March, and said gains should be brief as worries about a supply glut linger in the market.
“You don’t want to be short oil when there are stories about bombings next door to Saudi Arabia, even if it’s the Saudis who are leading the charge,” said Joseph Posillico, senior vice president of energy futures at Jefferies in New York.
“But with shorts squeezed out of the market, particularly those under $50 WTI, we are reassessing where to go. I personally don’t think this rally has legs as fundamentally nothing’s changed.”
Oil prices jumped more than $3 at their highs, but pared some gains after the dollar rebounded.
Brent settled up $2.71, or 4.8 percent, at $59.19 a barrel. U.S. crude finished up $2.22, or 4.5 percent, at $51.43. On Wednesday, prices had gone up 3 percent on a weak dollar.
Still, worries about swollen supplies have kept oil prices down about 50 percent from last summer’s highs above $100 a barrel.
A Saudi military spokesman said there were no immediate plans to launch ground operations in Yemen. Still, the kingdom strengthened security at borders and around oil and industrial facilities.
Arab producers must ship crude past the Yemen coastline via the Gulf of Aden to get to the Suez Canal, a key passageway to Europe.
The waters between Yemen and Djibouti, known as Bab el-Mandeb, are less than 40 kilometers (25 miles) wide, and considered by the U.S. Energy Information Administration to be a “chokepoint” for global oil supplies.
The EIA estimated 3.8 million barrels per day passed through Bab el-Mandeb in 2013. Egypt sent naval vessels to help secure the passage.
Iran denounced the Saudi air strikes. Russian President Vladimir Putin, in a phone conversation with his Iranian counterpart, called for an “immediate ceasefire.” Pakistan, a Riyadh ally far from the conflict, promised a “strong response” to any threat to Saudi integrity.
U.S. Secretary of State John Kerry touched on the conflict with Iran’s foreign minister before talks on Tehran’s nuclear program.
Barclays analyst Michael Cohen said the Saudi action could exacerbate tensions in Libya, Syria and Iraq.
“What’s going on right now is a trend in the region,” he said. (Additional reporting by Jessica Resnick-Ault in New York; Himanshu Ojha, David Sheppard in London; Aaron Sheldrick, Osamu Tsukimori in Tokyo; Meeyoung Cho in Seoul; Henning Gloystein and Florence Tan in Singapore; Editing by Marguerita Choy, Tom Brown and David Gregorio)