Brent crude prices reversed after jumping back above $118 a barrel on Monday, and U.S. oil pared gains after concerns about Libya's conflict and the threat of wider supply disruptions in the Middle East lifted it to the highest level since September 2008.

Profit taking in the trade on the spread between Brent and its U.S. counterpart was cited by traders and brokers. The spread was reduced more than $1 to under $10 a barrel, after rising above $17 a barrel last week.

The WTI-Brent spread is starting to unwind, but the Libya fighting and concerns about Saudi Arabia and the region remain, said Richard Ilczyszyn senior market strategist at Lind-Waldock in Chicago.

Britain and France said they were seeking U.N. authority for a no-fly zone over Libya, as Muammar Gaddafi's warplanes counter-attacked rebels and aid officials said a million people were in need.

Trading was volatile, with investors reacting both to attacks by Gaddafi supporters to retake an oil hub from rebels and then to rumors that Gaddafi was seeking a deal with rebels to secure a safe exit from the country.

Brent crude futures for April delivery fell 93 cents to settle at $115.04 a barrel, pulling back from an earlier $118.50 peak.

U.S. crude futures for April delivery rose $1.02 to settle at $105.44, the highest close since September 2008.

The $106.95 intraday peak was U.S. crude's highest price since September 26, 2008, when front-month crude reached $108.11.

Brent's premium to its U.S. counterpart fell $1.68 cents to $9.64 at 4:01 p.m. EST (2101 GMT), having narrowed from a record above $17 hit March 1, according to Reuters data.

LIBYAN FIGHTING

Government forces seeking to dislodge rebels from Libya's strategically important coast struck at the Ras Lanuf oil town.

OPEC-member Libya usually produces about 1.6 million barrels per day and its output has been cut by as much as 1 million bpd, according to the International Energy Agency.

A leading member of Libya's ruling establishment appealed to rebel leaders for dialogue in the clearest sign yet Gaddafi may be ready to compromise with opponents challenging his rule.

The offer was dismissed by rebel leaders.

With Libya still in turmoil, Saudi Arabia's security forces detained at least 22 minority Shi'ites who protested last week against discrimination, activists said on Sunday, as the kingdom tried to keep the wave of Arab unrest outside its borders.

(Additional reporting by Alex Lawler and Karolin Schaps in London and Alejandro Barbajosa in Singapore; Editing by Walter Bagley)

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