By Alex Lawler

LONDON (Reuters) - Oil rose to almost $72 a barrel on Monday as
Iran's supreme leader said the Islamic Republic would press on with its nuclear work, implying it will not heed a U.N. demand to stop enriching uranium.

The row over Iran's nuclear program has raised concern of disruption to oil flows from the world's fourth-largest exporter. Iran had said it would respond formally by Tuesday to Western incentives to halt enrichment.

"The market is saying, my God, there are going to be sanctions and it may involve oil," said Deborah White, oil analyst at Societe Generale.

U.S. crude was up 76 cents at $71.90 a barrel by 1148 GMT. London Brent crude rose $1.30 to $73.60.

The United Nations Security Council has demanded that Iran halt its nuclear work by a second deadline of August 31, raising the prospect of punitive action by the U.N.

The United States, Russia, China, France, Britain and Germany have offered incentives for Iran to suspend enrichment. Tehran, which insists its nuclear aims are purely civilian, shows no sign of accepting the package.

Supreme Leader Ayatollah Ali Khamenei, Iran's highest authority, was quoted on state television on Monday as saying Iran would pursue its nuclear plans.

"The Islamic Republic of Iran has made its decision and, in the issue of nuclear energy, will continue its path powerfully ...and it will receive the sweet fruits of its efforts," he said.

Oil has risen about 18 percent this year in New York on concern the nuclear row could cut Iran's exports of more than 2 million barrels per day and as violence in Nigeria reduced supplies.

Dealers are also watching the week-old truce between
Israel and Hizbollah, which the U.N. said on Sunday could easily collapse again into "an abyss of violence and bloodshed" if the U.N. resolution that engendered it was violated further.

The conflict had boosted New York crude to a record $78.40 on July 14 on worries it could spread to oil producers in the Middle East, source of almost a third of world supply.

But prices fell back in response to the ceasefire and on Friday dipped below $70 for the first time since June.

Easing supply pressure, BP (BP.L) said on Friday that it had boosted output by 70,000 bpd at its Prudhoe Bay oilfield in Alaska in the last several days to about 220,000 bpd, or about half of normal operating levels.

The supply loss from the biggest U.S. oilfield raised fears of an unexpectedly big drop in crude inventories. But data last week showed a decline that was in line with forecasts.

Oil near $72 as Iran vows to pursue atomic work