Oil prices bounced higher on Tuesday as the market focused on Iraqi threats of retaliation against any US-led attack and as US President George W Bush prepared to address the nation.

"Some traders are looking at whether the threat of war has really subsided, and are taking positions in case the State of the Union address is really more aggressive than the previous rhetoric from Bush," said John Hirjee, senior energy analyst at Deutsche Bank in Melbourne.

US light crude for March gained 34 cents to $32.65 a barrel after losing 99 cents, or three per cent, in New York on Monday.

The market was less than $3 per barrel below 26-month highs struck last week. Oil has risen some 30 per cent since mid-November on concerns that war in Iraq could upset supply from the Middle East while a prolonged strike in Venezuela has curtailed oil production and exports.

Iraqi Deputy Prime Minister Tareq Aziz told Canada's CBC television that Iraq might strike at Kuwait to retaliate against any US invasion.

"Kuwait is a battlefield and American troops are in Kuwait and preparing themselves to attack Iraq. If there will be an attack from Kuwait I cannot say that we will not retaliate. We will of course retaliate against the American troops wherever they start their aggression on Iraq. This is legitimate," he said in an interview in Baghdad.

However, Aziz, speaking after UN weapons inspectors said Baghdad could be doing more to help their probes, promised Iraq would cooperate more in future.

Aziz said there were only two areas of contention between Iraq and the inspectors -- the question of whether U2 surveillance planes could fly over the country and the conditions under which UN inspectors could interview Iraqi scientists.

"All other aspects of cooperation have been met and we promise to be more forthcoming in the future replying to all their needs in (a) way that will satisfy them," he told CBC.

The United States and Britain have launched a massive military build-up in the Gulf region ahead of a possible war to disarm Iraq of alleged illegal weapons.

The world is waiting to hear if President Bush will provide further clues on his next move when he delivers his State of the Union address at 0200 GMT on Wednesday.

Oil prices plummeted on Monday when chief United Nations weapons inspector Hans Blix was unable to corroborate US claims that Baghdad had rebuilt its weapons of mass destruction arsenal, saying he could not give a verdict one way or another.

Blix sharply criticised Iraq for not disclosing all of its long range missile, chemical and biological arms programmes.

"It is not enough to open doors. Inspection is not a game of catch as catch can," Blix said.

"Iraq appears not to have come to genuine acceptance, not even today, of the disarmament that was demanded of it."

UN Secretary-General Annan said arms experts should be given a "reasonable amount of time". "If they need time, they should be given the time to do their work," he said.

European and Middle Eastern allies are pushing the United States to allow the inspectors more time, possibly until March 1, officials and former policy makers told Reuters at the World Economic Forum in Davos, Switzerland.

A debate within the Venezuelan opposition on Monday over scaling back its two-month strike kept a rein on oil prices.

The country's oil industry has been paralysed by a strike aimed at toppling President Hugo Chavez.

Venezuelan crude output has recovered from the lows of December and strikers said on Monday production was about 966,000 barrels per day, 29 per cent of pre-strike levels. Chavez claims production has reached 1.32 million barrels a day.

US ready for mid-Feb war

Meanwhile, reports said that US military will be ready by mid-to-late February to quickly go to war with Iraq if President George W Bush so decides, Pentagon officials were on Tuesday quoted as saying, even as evidence showed Iraq was preparing for an urban warfare, moving its missile launchers to civilian buildings around Baghdad.

Officials told CNN that if Iraq were to make an aggressive move before then, the United States could respond instantly, but any action might be limited to strikes by fighters, bombers and cruise missiles.

The February timeframe refers to the goal of being ready with a full invasion force that could achieve the goals of disarmament and regime change, they said.

Meanwhile, US intelligence revealed photographic evidence gathered in recent days that Iraqi forces have moved an increasing number of hand-held surface-to-air missile launchers and anti-aircraft artillery pieces into key locations in and around the capital, Baghdad, CNN reported.

The network said it was told that the imagery shows launch sites on civilian buildings and other areas the United States would hesitate to strike.