LONDON (Reuters) - Oil surged to record highs above $78 on Friday on fears the conflict between Israel and Hizbollah could escalate and spread to more Middle East countries.

Iran's nuclear standoff with the West, fears over oil supply in Nigeria due to militant attacks, an influx of fund buying and falling U.S. crude supplies also contributed to the rise in the oil market -- which is up nearly 30 percent this year.

U.S. crude soared to as high as $78.40 a barrel in intraday trading. By 1545 GMT, the August contract was at $77, up 30 cents.

London Brent was 26 cents higher at $76.95, after jumping to a record of $78.03 a barrel earlier in the session.

"The speculators are out there panicking about Israel because they think it's going to spread through the Middle East," said Mike Barry, director at London's Energy Market Consultants.

Israel struck Hizbollah targets and devastated a wide array of Lebanese civilian installations on Friday, drawing mounting world criticism of its tactics, since the Shi'ite fighters seized two of its soldiers and killed eight.

Hizbollah, which wants to trade its captives for prisoners held in Israel, fired more rockets across the frontier.

Iranian President Mahmud Ahmadinejad on Thursday warned that any Israeli strike on Syria would be considered an attack on the whole Islamic world that would provoke "a fierce response." Both Iran and Syria support Hizbollah.

Neither Israel nor Lebanon are oil producers but both lie at the heart of the Middle East, which collectively pumps nearly a third of global output, leaving oil traders very nervous.

"Rarely has this market been as jittery," said Anthony Sabino, professor at St. John's University in New York.

OPEC sought to calm the market, saying there were sufficient supplies to meet global demand. "The market remains well-supplied with crude," the cartel said in a statement. "Geopolitical developments, over which OPEC has no influence, have been behind this sudden rise in volatility."

Eyes on $80 oil

Illustrating the market's sustained strength, prices for oil futures contracts to be delivered further ahead were trading above $80, from December 2006 to August 2007.

"There is nothing to stop prices at the moment with the stream of headlines that are coming in. All we need now is a big hurricane," Barry said.

"With Israel and Nigeria, Iran completes the triumvirate of key tensions supporting prices," said Mark Pervan, a resources analyst at Daiwa Securities.

Oil prices averaged $67.67 so far this year, but were still a long way from the inflation adjusted $87.65 average of 1980, the second oil shock that followed the 1979 Iranian revolution.

Some experts cautioned that prices could just as easily fall should tensions ease, especially as much of the money that had been invested was speculative.

"There's a lot of new financial investment coming into the market," said Michael Wittner of Calyon investment bank.

"Some of that will be hot money, so profit-taking could take us below $75 in a heartbeat."