The news that Baghdad is to allow "unconditional" over-flights of its territory by US spy planes has helped pull the price of oil and gold down from their tension-fuelled heights.

On Monday, a crisis brewing at Nato over whether the alliance should defend Turkey's borders in the event of war in Iraq scared investors, sparking a flight to the traditional safe haven of gold.

This increases the likelihood that America will go in alone against Iraq which is probably the worst of all scenarios Trader

Oil prices were also rising as traders feared imminent action.

But Iraq's decision to allow spy-planes offered welcome relief, and by the end of the day in Europe both oil and gold were on the way down.

Brent crude oil in London fell back from the 26-month high seen earlier in the day, down 66 cents a barrel at $31.68.

In Asian trade, the spot price of gold recovered some of its losses, after falling 2% to $362.60 an ounce in New York, to trade at $363.00 at 0710 GMT.

War jitters had eased somewhat over the weekend on news UN weapons inspectors were making progress.

But Monday's news of the deep rift in Nato between the US and France and Germany rekindled all the worries built up over the past few months.

The alliance was thrown into a crisis after France, Germany and Belgium said on Monday they would block the organisation from preparing military support for Nato member Turkey in case of a US-led war on Iraq.

"This increases the likelihood that America will go in alone against Iraq which is probably the worst of all scenarios," said a trader at a British bank.

Two-year highs

Oil prices have risen more than 10% this year, mainly driven by investors' worries over what impact a war in the Gulf would have on global oil supplies.

But reports that the US is running low on heating fuel in the middle of the winter season also lifted prices.

Adam Sieminski of Deutsche Bank said concerns that heating oil supplies in the US had deepened as the recovery of exports from Venezuela reached a plateau.

"Inventory levels are very low. There have also been reports that the recovery in Venezuela had slowed," he said.

Oil exports from Venezuela, the world's fifth biggest oil exporter and key supplier to the American market, have slowed down because of a crippling general strike.