January New York Mercantile Exchange (NYMEX) crude futures were trading at $24.95 per barrel at 0645 GMT, up 36 cents from their close in New York.The contract had dropped sharply in New York trade on Tuesday, ending the day $1.37 off at $24.59. But prices recovered in Asian trade, after the American Petroleum Institute (API) report late on Tuesday showed a decline in US crude stocks for the third consecutive week.

API said crude stocks for the week ended November 26 fell 3.56 million barrels. It also reported a fall of 1.54 million barrels in gasoline stocks, although distillates, which includes heating oil, were higher by 1.68 million.

Current US crude prices are more than $2.00 per barrel down from the nine-year high of $27.15 traded at the start of last week, which had been spurred by a halt in Iraqi exports.

The market had cooled down subsequently on assurances by Saudi Arabia that it was committed to maintaining stability in the oil market, and would not allow prices to rise out of control.

Comments by Venezuela, Mexico and Saudi Arabia - which have led the oil industry's output policy - that they would act jointly to ensure oil supply if the Y2K bug hit, also eased the bullish market.

But traders said a crude rally could potentially resume on the API data and haggling in the United Nations about Iraq policy that could once again disrupt Iraqi oil exports.

At the United Nations, a senior western diplomat said the United States would seek a short extension, possibly only one week, to Iraq's oil-for-food deal with the UN.

The short extension was to provide the UN Security Council with more time to consider its overall policy on Iraq. But Iraq's UN envoy said if such a resolution were passed his country would reject it.

The Security Council has until Saturday to renew the deal,and must decide if this would be an short extension or for the customary six months. Last week, an earlier US proposal for a two-week extension of the deal was rejected by Iraq, leading it to suspending its oil exports and send prices soaring to their nine-year peaks.Iraq had earlier signalled it could accept a six-month extension of the deal.