Oil prices rebounded toward $77 a barrel on Monday, aided by a weaker US dollar, but investors continued to eye developments in debt-laden Dubai with caution over their impact on the pace of the global economic recovery.

Concerns about a sluggish recovery in global fuel demand, along with high fuel stockpiles in the US, have pressured crude prices, which are set for a fall of about 0.7 per cent this month, their first decline in four months.

"The Dubai debt scare situation has eased slightly and the US dollar has weakened, so we're now seeing more investors flood back into the market and that's driving prices up," said Ben Westmore, a commodities analyst at National Australia Bank.

"But the rebound will be limited because there's still a lot of uncertainty around the Dubai issues and people are still trying to digest what it could mean to the world economic recovery."

US crude for January delivery rose 61 cents to $76.66 a barrel by 0337 GMT, retracing some of Friday's $1.91 losses.

London Brent crude gained 42 cents to $77.60.

Prices are up 72 percent so far this year, but are still roughly half their July 2008 high of more than $147 a barrel.

Financial markets shuddered last week after Dubai said it would ask creditors of state-owned Dubai World and Nakheel, the builder of its palm-shaped islands, for a standstill pact as a first step toward restructuring billions of dollars of debt.

But confirmation from Abu Dhabi, the wealthy capital of the UAE, that it would extend some help to Dubai helped calm some market concerns.

Moves by the UAE to offer emergency assistance to banks in Dubai also soothed market fears about a looming debt default.

Asian stocks made a tentative recovery after last week's steep sell-off over the Dubai debt crisis as investors' nerves steadied on hopes the fallout of a potential default would be limited.

US dollar movements and developments in Dubai, will be key factors in driving the direction of oil prices this week, analysts said.

The greenback edged down against other major currencies on Monday, with the dollar index falling 0.52 percent against a basket of currencies.

Despite Monday's rally, analysts cautioned that sentiment remains on edge and there could be another round of correction in the equities and commodities markets if Dubai was not able to resolve its debt woes.

"Indeed, oil prices could be at the mercy of the renewed financial pessimism till further clarity on the Dubai situation emerges," Barclays Capital said in a research note on Friday.

"While short forays below the recent trading range cannot be ruled out as a result of the renewed pessimism, we do not see any underlying shift in the oil market fundamentals and thus expect a return to normalcy once initial fears abate," it said, adding that it saw $70 as the minimum support level.

Separately, Iran announced plans on Sunday to build 10 new uranium enrichment plants in a major expansion of its atomic programme, just two days after the UN nuclear watchdog rebuked it for carrying out such work in secret.

Analysts said traders were unlikely to place too much premium on supply risks at the moment as the market remained well supplied and overall demand outlook was still bearish. – Reuters