"The markets had become quite hopeful on Friday that there would be some sort of a resolution, but the meeting over the weekend didn’t result in any guarantees from Iran and that raises the possibility of additional tensions."

Major powers on Saturday gave Iran two weeks to answer calls to rein in its nuclear programme or face tougher sanctions after talks ended in stalemate despite unprecedented U.S. participation.

Prospects of ending the row looked dim as Iran’s top nuclear negotiator Saeed Jalili said Iran would not discuss a demand to freeze sensitive nuclear activities or face tougher sanctions, though Iran’s president on Sunday described the talks as a step forward.

The recent war of words between Iran and the West over Tehran’s nuclear programme have heightened tensions in the Middle East and helped push oil prices to a record high of $147.27 earlier this month.

Worries that Tropical storm Dolly could hit the Gulf of Mexico also boosted oil prices on Monday.

The storm headed for Mexico’s Yucatan Peninsula, but the U.S. National Hurricane Center in Miami said it posed no immediate threat to Gulf oil installations slightly south of its projected path.

Forecasters expect Dolly to emerge into the Gulf of Mexico on Monday local time, north of the country’s huge Cantarell oil field and other ports and platforms used by the world’s sixth-largest oil producer and top supplier to the United States.

In Brazil, a national oil workers strike that had a limited impact on Petrobas’ output ended at midnight on Friday but more walkouts loomed on the horizon.

Despite oil’s rebound on Monday, analysts said worries about the health of the U.S. economy due to the housing crisis would continue to weigh on oil prices, which have shed over $18, or 13 percent, from the peak struck on July 11.

(Reporting by Fayen Wong, Editing by Michael Urquhart)