Oil prices surged higher Thursday amid tensions over major crude exporter Iran and in the wake of positive Chinese and US economic data.

New York's main contract, light sweet crude for delivery in April, closed at $108.84 a barrel, up $1.77 from Wednesday's closing level.

In London, Brent North Sea crude for April jumped $3.54 to settle at $126.20.

"Crude prices are extending gains... with the Iranian situation again seen to be the main market driver," said Jack Pollard, analyst at Sucden Financial Research.

On Wednesday tensions between the West and Iran over its alleged nuclear weapons program escalated after the US Air Force chief of staff, General Norton Schwartz, warned that the United States has powerful bombs at the ready in the case of possible military action against Iran.

Iran insists its nuclear program is for civilian purposes.

Back on the US economic front, post-recession conditions continued to slowly improve but were "a little bit disappointing," Phil Flynn at PFG Best said.

High unemployment and a depressed housing sector have been holding back recovery in the world's largest economy and oil consumer.

A bright spot was new claims for US unemployment benefits, which edged down last week and hovering at 2008 lows, the US Labor Department said in a report showing steady improvement in the job market since mid-2011.

The latest US jobless claims report "is indicative of a stabilization" in an improving economy "which clearly boosts oil prices" as traders expect a pick-up in demand, said Andy Lipow at Lipow Oil Associates.

Analysts said prices also found support from positive economic data from China, where manufacturing activity expanded for the third straight month in February as export orders improved.

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