World oil prices rallied on Wednesday as dealers seized on news that Israel had killed a top Hamas commander in an air strike, stoking geopolitical tensions in the crude-rich Middle East region.

In late afternoon London deals, Brent North Sea crude for delivery in December spiked $1.58 to $109.84 per barrel.

New York's main contract, light sweet crude for December or West Texas Intermediate (WTI), gained 87 cents to $86.26 a barrel.

"Crude oil prices have jumped back once again after news of fire fights breaking out in the Middle East as Israel launched an airstrike on Gaza killing a Hamas commander, in retaliation for rocket attacks on Israel earlier this week," said CMC Markets analyst Michael Hewson.

"This has prompted retaliatory action and reignited the geopolitical risk premium trade over supply concerns in the event of an escalation, as talk of an Israeli ground operation gains traction."

A top Hamas commander was among seven people killed in more than 20 Israeli air strikes on the Gaza Strip on Wednesday, as Israel began an operation targeting militant groups.

Ahmed Jaabari, the operational commander of Hamas's armed wing, the Ezzedine al-Qassam Brigades, was killed alongside his bodyguard, Mohammed al-Hams, in an initial Israeli strike on a car in Gaza City which took place just before 4:00 pm (1400 GMT), the Islamist movement said.

Shortly afterwards, Israel pounded the Gaza Strip with another 20 air strikes, killing five more people, two of them children, Hamas health minister Mufid Mukhalalati said in a televised press conference at Gaza City's Shifa hospital.

He said another 30 people had been injured in the wave of strikes on targets across the territory which hit Gaza City, the northern town of Beit Lahiya and the southern city of Khan Yunis.

"The Israeli occupation has carried out more than 20 air strikes on targets and headquarters of the police and security in the Gaza Strip," interior ministry spokesman Islam Shahwan told AFP.

Hospitals and medical centres across Gaza were put on high alert after the initial strikes as Israel warned the hit on Jaabari was only "the beginning" and said "a significant number" of militant arms dumps were within civilian and residential areas.

The attacks came after a flare-up in violence between Israel and Gaza-based groups, which saw more than 120 rockets fired from the Palestinian territory into the Jewish state, and Israeli air strikes and shelling that killed seven people.

In earlier deals on Wednesday, the oil market won modest gains as dealers took their direction from the weaker dollar, but sentiment remained cautious over fears surrounding the US and eurozone economies, analysts said.

The weaker greenback makes dollar-priced crude cheaper for buyers using stronger currencies. That tends to increase demand and support higher price levels.

Oil traded mixed in Asia amid concerns over that the US fiscal cliff of tax hikes and spending cuts could tip the world's biggest economy into recession -- and potentially ravage energy demand.

The looming fiscal cliff has dogged financial markets since the re-election last week of US President Barack Obama.