Oil rose nearly 2 percent above $67 a barrel on Monday as U.S. equities jumped and news emerged that Iran was test-firing missiles.

U.S. stocks climbed as more merger and acquisition activity encouraged investors and hinted at economic recovery, which could spur energy demand.

U.S. crude rose $1.18 to $67.20 a barrel by 12:49 p.m. EDT (1649 GMT), after earlier falling as low as $65.41. London Brent rose 86 cents to $65.97.

Support for oil also came from Iran test-firing a type of missile on Monday that defense analysts said could hit Israel and U.S. bases in the Gulf region, state television reported.

Crude futures are following the stock market right now and the news from Iran firing missiles has sparked some buying, too, said Phil Flynn, analyst at PFGBest Research in Chicago.

Tensions over Tehran's nuclear program have supported oil prices in recent years. The country is the second-largest oil producer in the Middle East.

In late 2008, Iran threatened to block the Strait of Hormuz, through which about 40 percent of the world's globally traded oil passes, when tensions rose in another row with the United States around the nuclear work.

Even so, sluggish oil demand, reinforced by some lackluster economic data from the United States last week, continued to command investors' attention.

Oil prices posted their largest weekly decline in two to three months last week, pressured by government data showing U.S. crude oil inventories had risen, suggesting demand remains weak.

U.S. durable goods orders dropped by the largest amount in seven months while a rise in new home sales was less than forecast, according to data from the U.S. Commerce Department on Friday.

(Additional reporting by Gene Ramos and Robert Gibbons in New York, Alex Lawler in London, Fayen Wong in Perth; Editing by Marguerita Choy)

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