Reference Brent North Sea crude for May delivery dropped to $26.70 a barrel in late trading from $27.31 on Thursday evening.
In New York, light sweet crude May-dated futures gave up another five cents a barrel to $26.53 a barrel in early trading.
Prices spiked as high as $28 a barrel earlier this week as turmoil in the Middle East sparked concern about disruption to oil supplies from the region.
But Bush’s warning to Israel and the Palestinians on Thursday to step up peace efforts and his decision to send US Secretary of State Colin Powell on a peace mission to the region helped cool the feverish oil market, traders said.
So much so that traders shrugged at Khamenei’s call for oil supplies to be choked off to the West and other supporters of Israel to try to pressure Prime Minister Ariel Sharon into withdrawing his army from Palestinian territories.
"I call on all Arab and Islamic oil-producing countries to suspend their exports to the West and countries who have relations with Israel for a symbolic period of one month," Khamenei said.
"The oil belongs to the people and can be a weapon against the West and those countries who support the savage regime of Israel," he added.
But the Organisation of Petroleum Exporting Countries (OPEC) has ruled out a collective oil embargo by the mostly-Arab producer group.
"An oil embargo goes against the basic and primary objective of OPEC, i.e. stability of the market and security of oil supplies," OPEC Secretary General Ali Rodriguez told AFP through his spokesman.
An OPEC source added: "No rational and sane human being would really back such a move, because it will certainly backfire on all of us.