Oil prices fell 3.2 per cent on Monday as fierce fighting erupted in central Baghdad, raising speculation that the US-led war to oust President Saddam Hussein may end soon with little damage to Iraq's oil industry.

On the 19th day since Washington launched its attack, the US military said its troops had taken control of Saddam's main presidential palace and entered a second but met resistance from Iraq's Republican Guard defending key ministries.

"The expectations are that if Baghdad falls, there will be no need to fight for the oilfields. The fall of Baghdad signals a peaceful handover of the rest of Iraq's oilfields," said Sydney-based oil analyst Simon Games-Thomas.

"If war carries on and on, there's a greater risk of damage to oil infrastructure."

US light crude lost 93 cents to $27.69 a barrel. That brought losses to more than $2, or 7.3 per cent, since the United States launched its military campaign on March 20.

London's Brent crude shed 88 cents to $23.80 a barrel, 11 per cent down from pre-war levels.

Analysts expected oil prices to come under increased downward pressure if Iraq soon resumed crude exports, which were running at 1.7 million barrels per day under the U.N. oil-for-food exchange before the start of war. Shipments are now stopped.

Expectations from the US and British military are that the restoration of Iraqi exports from its southern oilfields will take at least three months.

Most of the fields, which pump about 60 per cent of Iraq's oil, are already under the control of invading troops, but the northern oilfields near Kirkuk are still in Iraqi hands.

Washington plans to remove Saddam, who it says has weapons of mass destruction. Iraq denies it has chemical, biological or nuclear arms.

At a meeting in London on Saturday, Iraqi exiles and senior US officials agreed that international oil companies should take a leading post-war role in reviving Iraq's oil industry.

Iraq's oil reserves rank second in size to Saudi Arabia's.

The talks between Iraqi experts under the auspices of the US State Department also recommended that Iraq remain in OPEC, but without limits on its production that apply to other members of the Organisation of the Petroleum Exporting Countries.

That is likely to raise fears in OPEC of a showdown in quotas, undermining the Saudi-led OPEC strategy at output restrictions aimed at supporting $25-a-barrel crude.

Demand worries

Analysts said they were reviewing the demand outlook for the second quarter after weak manufacturing and jobs data raised concerns the US economy might be close to recession, which would put a lid on any growth in petroleum consumption.

Airlines around the globe have also sharply cut flights due to the war in Iraq and the spread of a deadly flu-like virus from Asia.

Crude was also pulled lower last week by a surge in US fuel stocks and the return of some Nigerian oilfields to production after unscheduled stoppages due to civil unrest.

"In the short-term, the combination of these bearish factors supports our forecast of a low of $20 a barrel between now and the end of the quarter," SG economist Frederic Lasserre said in a research note.