By Laila Kearney

NEW YORK (Reuters) -Oil fell by nearly 2% on Monday after Israeli officials said they wanted to avoid dragging the Middle East into an all-out war while responding to a deadly rocket strike in the Israeli-occupied Golan Heights over the weekend.

Brent crude oil futures settled at $79.78 a barrel, falling $1.35, 1.7%. U.S. crude futures ended $1.35, or 1.8%, lower at $75.81 a barrel.

Two Israeli officials told Reuters on Monday that Israel wanted to hurt the Iranian-backed Lebanese group Hezbollah, which the country blames for the Saturday attack that killed 12 children and teenagers, without sparking a broader conflict.

"It seems like the market has come around to the idea that - even as horrific as these episodes are - they are not likely to cause a region-wide conflict," said John Kilduff, partner at Again Capital in New York.

On Sunday, Israel's security cabinet authorized Prime Minister Benjamin Netanyahu's government to decide on the "manner and timing" of a response to the attack at a sports field.

Israel vowed retaliation in Lebanon against Iran-backed Hezbollah, which denied responsibility for the attack. Israeli jets hit targets in southern Lebanon on Sunday.

The tensions sparked investor concerns about the potential impact on crude output from the world's largest oil-producing region, but so far output has not been affected.

"Despite renewed geopolitical tensions in the Middle East, the lack of any supply disruptions limits any positive price reaction," said UBS analyst Giovanni Staunovo.

Brent and U.S. crude lost 1.8% and 3.7% respectively last week on sagging Chinese demand and hopes of a Gaza ceasefire agreement.

"The economic problems in China are also sucking the juice out of the oil market," said Bob Yawger, director of energy futures at Mizuho in New York.

Data released this month showed that China's total fuel oil imports dropped 11% in the first half of 2024, raising concerns about the wider demand outlook in the world's biggest crude importer.

Prices also fell at the end of last week on news that the huge Dangote oil refinery in Nigeria is reselling cargoes of U.S. and Nigerian crude after technical problems at the plant.

Meanwhile, markets are keeping a watch on oil producer Venezuela after the country's electoral authority said that President Nicolas Maduro had won a third term with 51% of the vote despite multiple exit polls pointing to an opposition win.

The U.S. had previously said it would "calibrate" its sanctions policy towards Venezuela depending on how the election unfolds in the OPEC nation.

(Reporting by Robert Harvey in London, Yuka Obayashi in Tokyo and Emily Chow in SingaporeEditing by Richard Chang and Marguerita Choy)