Updated from 2:40 p.m. EDT

Oil futures took a late-session slide after the U.S. called for a cease-fire between Israel and the militant group Hezbollah, a sign traders took to indicate that the conflict would not widen to include Iran.

A cease-fire "should happen as soon possible when conditions are conducive to do so," said U.S. Secretary of State Condoleezza Rice Tuesday, Reuters reported.

A cease-fire requires the deployment of the Lebanese army to the borders, peacekeeping forces and the disarmament of Hezbollah, Israel has said. Two years ago, one of the conditions for Syria's withdrawal from Lebanon was the disarmament of the Iranian-backed militant group.

Rice has been cagey about an immediate cease-fire because Israel wants assurances that attacks won't break out again.

After spending most of the session above $76, light, sweet crude for August delivery closed down $1.76 at $73.54 a barrel, its lowest close in more than a week. The contract traded as high as $76.55 during the session.

The turnaround hit the rest of the energy complex, with gasoline falling 1 cent to $2.26 a gallon and heating oil shedding 3 cents to $1.98 a gallon.

Oil's decline came despite few signs of a letup in the violence itself, with Israeli air raids on Lebanon and Hezbollah rocket attacks on Haifa continuing. An Israeli general said Israel's campaign will last a few weeks to attain "very clear goals," the New York Times reported, though he did not elaborate on what those goals were.

More than 200 people have been killed in the conflict, which was sparked by Hezbollah's kidnapping of two Israeli soldiers last week. The fighting is the most intense since Israel invaded Lebanon in 1982.

The U.N. called for an end to the conflict and proposed sending an international security force to patrol southern Lebanon. The move would give the Lebanese government time to meet Israel's major demands.

Thousands of people were fleeing Lebanon to Syria or leaving by European boats to Europe. Around 100,000 Lebanese have left their homes since the fighting began, Reuters reported.

This year, oil prices have skyrocketed 24% as the conflict, production cuts in Nigeria and a tussle with Iran over its nuclear activities have inflamed fears that inventories could be cut. Global crude supplies are already tight, thanks to booming Chinese, Indian and U.S. demand for crude, and there is only 2 million barrels of daily spare capacity to cover output glitches.

The Israeli fighting has supplanted an ongoing standoff with Iran over its refusal to halt uranium enrichment which had been the focus of the energy markets. Some analysts have suggested that Iran may be behind the Hezbollah attacks as a way to divert attention from its nuclear program.

In the midst of attacks on global supplies, traders will be eying the U.S. Energy Department's weekly petroleum update due out on Wednesday. Inventories of oil are expected to have dropped by 650,000 barrels as refiners ramped up gasoline production to meet peak demand during the peak summer driving season. Crude is refined into products such as heating oil and gasoline.

Refining capacity is expected to rise to 91.5%, up from 90.5% the previous week as production in a key refining hub in Louisiana returns to full production. An oil spill shut down tanker traffic there and reduced output at three refiners, including one of the country's largest.

Gasoline stockpiles likely fell by 725,000 barrels from 212.7 million barrels as more Americans took to the roads. However, inventories are less than 1% below last year.

Distillates, a category that includes heating oil and jet fuel, probably jumped by 1.7 million barrels thanks to lower demand and surging imports and production. There is currently 7% more distillates in storage than last year.

After rising for much of the session on triple-digit weather across the country, natural gas slipped 22 cents to $5.55 per million British thermal units as traders took profits. Hot weather has increased demand for natural gas, which is used to generate electricity needed to power air conditioners. The heat will likely trim bulging inventories that currently are 19% above last year.

Meanwhile, energy-related equities followed crude lower, with the Amex Oil and Natural Gas Indices and the Philadelphia Oil Service Index each declining 1% to 2%. Chevron ( CVX), Valero Energy ( VLO) and Marathon Oil ( MRO) were falling the most, shedding around 1%.

Natural gas producers Apache ( APA), EOG Resources ( EOG) and XTO Energy ( XTO) were posting the largest declines of around 1% each.

Among oil service companies, Halliburton ( HAL), BJ Services ( BJS), Schlumberger ( SLB) and Tidewater ( TDW) were dipping 1% to 3%.