(Updates prices, adds analyst's comment, previous SINGAPORE)
LONDON, June 6 (Reuters) - Oil rose to stand above $128 a barrel on Friday, extending large gains in the previous session as the U.S. dollar weakened on signals the European Central Bank may raise interest rates this year.
U.S. light crude for July delivery <CLc1> was 92 cents up at $128.71 a barrel by 0825 GMT, off early highs of $128.87.
It surged $6.08 to $128.38 a barrel in after-hours trading on Thursday in the U.S., erasing two days of sharp losses triggered by worries that high oil prices were starting to dent demand.
London Brent crude <LCOc1> rose 50 cents to $128.04.
Analysts said the dollar's weakness in the wake of comments from the ECB sparked a rush to cover oversold positions.
"We may well see a follow through rally today as traders will be nervous of too much short exposure as fundamental headlines still emanate from a bullish stance," said Robert Laughlin at MF Global.
Societe Generale's head of commodities derivatives in Asia, Marc Lansonneur, said the market was in a state of uncertainty after Thursday's $6 move.
"If oil continues to rise, it could test $135 or $140...Today will be a key day because we'll see whether the rebound was purely technical or not. It could set the trend for next week," he added.
The dollar was steady against the euro on Friday, having fallen by more than 1 percent on Thursday after European Central Bank President Jean-Claude Trichet said a number of policymakers wanted higher interest rates and a hike was possible as soon as next month. [
]
DEMAND
The sharp reversal in the dollar put longer-term worries about weakening oil demand on the backburner, after they were rekindled earlier this week when India and Malaysia decided to raise domestic fuel prices to cope with bulging subsidy bills.
The International Energy Agency (IEA), an adviser to 27 industrialised countries, issues its latest forecasts next week and has said it may lower its 2008 demand growth projection further, after having already more than halved it to 1.03 million barrels per day (bpd).
But some analysts say subsidy cuts in Asia will not be enough to slow oil use.
"World oil demand growth is still accounted mostly by China, the Middle East and Latin America -- and through the summer, there is no reason to expect a material slowdown in demand growth in these areas," said Harry Tchilinguirian, oil analyst at BNP Paribas in London.
Ahead of a weekend meeting of G8 energy ministers plus their peers from China, India and South Korea, to try and agree on the role of consumer nations in stemming oil's five-year price rally, the IEA warned that oil demand would rise by 70 percent if governments continued with current policies.
It also urged world governments to start a $45 trillion dollar "energy technology revolution" or risk a 130 percent surge in carbon emissions by 2050. [
] (Reporting by Santosh Menon in LOndon and Maryelle Demongeot in Singapore; editing by James Jukwey)