By Deep Kaushik Vakil

April 19 (Reuters) - Oil steadied on Friday after prices

spiked earlier on reports that Israel had attacked Iran, as

market fears of a major escalation to hostilities in the Mideast

appeared to ease and a build-up of global oil stocks weighed.

The benchmark contracts surged more than $3 before dipping

back down. At 0845 GMT, Brent futures were up 14 cents,

or 0.2%, at $87.25 a barrel. The most active U.S. West Texas

Intermediate contract climbed 23 cents, or 0.3%, to

$82.96 per barrel.

Israel launched an attack on Iranian soil on Friday, sources

told Reuters, the latest tit-for-tat exchange between the two

countries that threatens to drag the region deeper into

conflict.

Iranian media reported explosions, but an Iranian official

told Reuters those were caused by air defence systems. State

media said three drones over the central city of Isfahan had

been shot down.

"The fear is that we are on an escalating tit-for-tat

retaliatory path. ... The hope is that the retaliatory strikes

will be fading in magnitude and then fizzle out," said Bjarne

Schieldrop, commodities analyst at SEB Research.

"The oil market is nonetheless concerned as there is too

much oil supply at stake."

Last weekend Iran launched hundreds of drones and missiles

in a retaliatory strike after a suspected Israeli attack on its

embassy compound in Syria. Most of the drones and missiles were

downed before reaching Israeli territory, with minimal damage

and casualties.

Investors have been closely monitoring Israel's reaction to

the April 13 Iranian drone attacks. The geopolitical risk

premium in oil prices had been unwinding this week on the

perception that any Israeli retaliation to Iran's attack would

be moderated by international pressure.

Meanwhile a rise in global oil storage weighed on prices.

"Visible oil stocks globally have steadily risen, which

seems counterintuitive given strong price action recently," Citi

analysts wrote in a note late on Thursday, citing a build of

about 1 million barrels per day in crude stocks over the first

quarter.

The U.S. also announced sanctions on Iran, an OPEC member,

targeting its unmanned aerial vehicle production after the

country's drone strike on Israel. The sanctions on Iran,

however, exclude its oil industry.