By Andrew Hayley

BEIJING (Reuters) -Oil prices jumped more than $4 a barrel in early Asian trade on Monday, as dramatic military clashes between Israeli and Hamas forces over the weekend deepened political uncertainty across the Middle East.

Brent crude rose $4.18, or 4.94%, to $88.76 a barrel by 0120 GMT, while U.S. West Texas Intermediate crude was at $87.02 a barrel, up $4.23, or 5.11%.

The surge in oil prices reversed last week's downward trend - the largest weekly decline since March - in which Brent fell about 11% and WTI retreated more than 8% amid concerns about high interest rates and their impact on global demand.

Palestinian Islamist group Hamas on Saturday launched the largest military assault on Israel in decades, killing hundreds of Israelis and triggering a wave of retaliatory Israeli air strikes on Gaza that continued through Sunday.

"Increasing geopolitical risk in the Middle East should support oil prices ... higher volatility can be expected" analysts from ANZ Bank said in a client note.

The eruption of violence threatens to derail U.S. efforts to broker a rapprochement between Saudi Arabia and Israel, in which the kingdom would normalise ties with Israel in return for a defence deal between Washington and Riyadh.

Saudi officials had reportedly told the White House on Friday that they were willing to raise output next year as part of the proposed Israel deal.

An increase in Saudi output would have helped to relieve supply tightness after months of supply cuts from key producers Saudi Arabia and Russia.

A normalisation of Saudi-Israeli relations would likely freeze recent moves toward detente between Saudi Arabia and Iran.

The attacks drew condemnation from Western nations but were openly praised by Iran and by Hezbollah, Iran's allies in Lebanon.

Market attention has turned to the possibility of Iranian involvement in the attacks, which Israeli authorities have already alleged.

"For this conflict to have a lasting and meaningful impact on oil markets, there must be a sustained reduction in oil supply or transport," Vivek Dhar, an analyst at Commonwealth Bank of Australia, said in a note.

"If Western countries officially link Iranian intelligence to the Hamas attack, then Iran’s oil supply and exports face imminent downside risks," Dhar said.

(Reporting by Andrew Hayley; Editing by Jamie Freed and Sonali Paul)