July 24 (Bloomberg) -- Crude oil rose from a seven-week low as traders viewed this week's 3 percent decline as an opportunity to buy futures contracts.

Israel's top military commander said he told Pentagon officials that force may be needed to stop nuclear research by Iran, the Middle East's second-largest producer. Oil fell earlier as a stronger dollar limited the appeal of commodities as a currency hedge and after data indicated that prices are cutting demand in the U.S. and Japan.

``This market has become very oversold after prices dropped $5 or so this week, so what we're seeing this morning is a modest and quite probably temporary recovery,'' said Christopher Bellew, senior broker at Bache Commodities Ltd. in London.

Crude oil for September delivery advanced as much as $1, or 0.8 percent, to $125.44 a barrel, on the New York Mercantile Exchange, trading for $125.13 at 1:40 p.m. London time.

Yesterday, oil dropped $3.98, or 3.1 percent, to settle at $124.44 a barrel, the lowest close since June 4.

Iran, which produced about 3.85 million barrels a day last month, has warned it may blockade the Straits of Hormuz, the export channel for a quarter of the world's crude, if it's attacked.

``We all realize, both the Americans and us, that all options must be prepared,'' Israeli Lieutenant-General Gabi Ashkenazi said in an interview from Washington on Israel Radio. ``There is no doubt that diplomacy must be given priority.''

Fuel Demand

Oil earlier fell as much as 82 cents, or 0.7 percent, after a U.S. Energy Department report yesterday showed that U.S. fuel demand averaged 19.9 million barrels a day last week, the lowest since January 2007. Japan imported 0.7 percent less oil in June than a year ago, the first decline in nine months, the Ministry of Finance said today.

``Oil prices are at a point that will bring about demand- side adjustments that will ultimately cause prices to be at a lower level,'' said David Moore, a commodity strategist with Commonwealth Bank of Australia Ltd. in Sydney. ``There seems to be an intangible factor here where sentiment has swung quite sharply in the past couple weeks.''

Brent crude oil for September settlement was at $125.93 a barrel, up 64 cents, on London's ICE Futures Europe exchange at 1:25 p.m. London time. It dropped $4.26, or 3.3 percent, to close at $125.29 a barrel yesterday, the lowest settlement since June 4.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

Last Updated: July 24, 2008 08:42 EDT