The reprisal sparked calls from rebels for foreign air strikes on African mercenaries they said were helping him stay in power.

"It looks like an attack fairly close to what is one of Libya's largest storage and export terminals," said Andy Lebow, trader at MF Global in New York.

"It's hard to say if the Libyan government is trying to target oil infrastructure in the east or whether they're just targeting rebel-held areas, but the market's reacting to this threat either way."

Gaddafi pledged in a fiery speech before hundreds of supporters he would crush the revolt against his rule.

By 12:35 p.m. EST Brent crude traded up $1.57 to $116.99 a barrel, off the session high of $117.81. Brent hit a 2-1/2 year high near $120 a barrel on February 24 on the Libyan crisis.

U.S. crude futures rose $2.05 to $101.68 a barrel after hitting $102.37. They rose above $103 on February 24.

Brent's premium against U.S. crude widened to more than $16, after closing at $15.79 on Tuesday, when the Brent/West Texas Intermediate spread hit $17.12, a record.

The head of Libya's oil company, Shokri Ghanem, told Reuters the nation's problems could push prices over $130 a barrel if they persist.

Libya's normal output of 1.6 million barrels per day had been cut to 700,000-750,000 bpd as most of the industry's foreign workers had taken flight after the crisis began, he said.

Governments in Yemen, Oman, Iran and Iraq have clashed with protestors seeking reforms as popular unrest has spread in the region holding more than 60 percent of the world's oil reserve.

Crude pared gains in the morning after the release of U.S. oil inventory data from the U.S. Energy Information Administration showed inventories at the Cushing, Oklahoma, delivery point for the New York Mercantile Exchange's oil futures contract hit a record high.

Brimming stocks at the hub have been partly responsible for the wide discount of U.S. crude to Brent in recent weeks.

Total U.S. inventories of both crude and refined products fell, however, the EIA report showed.

**Reporting by Gene Ramos, Robert Gibbons, David Sheppard, Matthew Robinson in New York; Jessica Donati-Bourne in London; Florence Tan in Singapore; Editing by Marguerita Choy and David Gregorio