Oil was little changed above $125 a barrel on Friday after short-covering a day ago helped stem a nearly two-week dive, but analysts said lingering demand worries made further gains ahead of the weekend unlikely.

Concerns that high prices and a weaker US economy will undermine demand have driven oil down more than $20 from a record peak above $147 a barrel set earlier this month, but technical trading and a short-covering bounce helped prices on Thursday.

US light crude for September delivery edged down 7 cents to trade at $125.42 a barrel by 0114 GMT after gaining $1.05 a barrel a day ago, recovering from a seven-week low.

London Brent crude rose 3 cents to $126.47 a barrel at the same time.

"Since the source of much of the selling of the past 1-½ weeks has been the heightened attention to demand deterioration, we look for this market to place greater emphasis on sharp stock market sell-offs than currency movements going forwards," said Jim Ritterbusch, president of Ritterbusch & Associates.

US stock markets fell by 2 per cent or more a day ago after news of another drop in US home sales, adding to the gloom surrounding the outlook for the world's top oil user.

"All in all, we don't necessarily anticipate a short-covering rally (today) ahead of the weekend given the bearish momentum that remains intact," Ritterbusch said, adding he expected crude could drop as low as $117 within about a week.

Some analysts say the price drop in oil and other commodity markets since mid-July has been driven by some traders unwinding short-dollar/long-oil positions, which have also helped lift the US currency to a one-month high against the yen.

Bearish stock data on Thursday coupled with mild weather forecasts drove natural gas prices down 5 per cent, in turn weighing on oil, traders said.

Tropical Storm Dolly, which was the Atlantic season's second hurricane, was scratched off the market's agenda as it moved moved inland across South Texas, having barely put a tend in crude oil, natural gas and fuel output.

Even after the recent price fall, oil has still rallied by almost 30 per cent in 2008 and is up six-fold from 2002 due to demand from growing economies like China.

The US Senate will vote on Friday on a Democratic bill that seeks to curb excessive speculation in the energy markets. But Republicans said they had the votes to block passage.