Oil jumped $1 a barrel on Friday after the U.S. Federal Reserve cut its discount rate by 50 basis points to restore order in financial markets that have been hammered by credit worries.

Forecasts showing Hurricane Dean was on a course that could take it towards Gulf of Mexico oil rigs and refineries also supported oil markets, nervous of damage to the region that pumps a third of U.S. oil output.

The cut may ease the liquidity crisis in the United States, said Christopher Bellew of oil brokerage Bache Financial.

But he added: Of course you could interpret it as an indication of how serious they think the problem is.

U.S. crude was up 96 cents at $71.96 a barrel at 1351 GMT. London Brent crude was up 74 cents at $70.51.

Markets have been hit by fears of financial instability after troubles with risky U.S. mortgages and a credit squeeze that had already prompted central banks, including the Fed, to pour money into the financial system.

Oil's rise was part of a broader rally that also lifted stock markets. It took a pounding on Thursday as investors sold to offset losses elsewhere or out of fear that a squeeze on credit will slow economic growth.

The Fed move is supportive for oil. It is basically suggesting that the Fed is going to take action to stem any decline or slowdown in the economy, said Eric Wittenauer, energy analyst at A.G. Edwards in St. Louis.

European shares were up 2.8 percent and London's FTSE 100 Index surged 3.7 percent. The Dow Jones Industrial Average added 1.8 percent.

HURRICANE WATCH

Oil investors were tracking the progress of Hurricane Dean which threatened to become a dangerously powerful storm as it moved into the Caribbean and aimed for Mexico's Yucatan Peninsula or the Gulf of Mexico.

Hurricane Dean should not yet be discounted, said Olivier Jakob of Petromatrix. History has shown that a hurricane crossing across the Yucatan can quickly regain strength once it steps back into the Gulf.

Energy markets have been on edge since 2004 and 2005, when hurricanes Ivan, Katrina and Rita toppled oil rigs and flooded refineries on the U.S. Gulf Coast.

Dean was expected to become a Category 4 storm next week. Some oil companies did not envisage a disruption to operations.

Hovensa LLC does not expect to have to shut down its 500,000 barrels per day oil refinery in St. Croix, the Virgin Islands, because of Dean, a company spokesman said on Friday.

Oil is down about 8 percent from its August 1 record high of $78.77 and remains vulnerable to further losses, say analysts.

It will be some time before commodity markets decouple themselves from the tumult going on in the financial markets, said Edward Meir of MF Global.

Should we get another sharp drop in equities, energy prices will most likely be swept lower in the downdraft once again.

(Additional reporting by Jonathan Leff and Barbara Lewis)

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