UPDATE 4-Oil prices rise above $106, focus turns to Middle East
* U.S. decision to arm Syrian rebels could cause escalation
* Brent bounces more than $3 a barrel from week's low
* Dollar remains weak, hits four-month low
(Recasts with producer prices, fresh prices, quote)
LONDON, June 14 (Reuters) - Brent oil futures rebounded above $106 a barrel on concern over the war in Syria and expectations U.S. monetary stimulus would continue after a report showed underlying inflationary pressures were muted.
Though Syria is not key to global oil supply, investors are worried that escalation in the civil war could drag in other countries and plunge the whole oil-producing region into conflict.
"I think the focus, at least for oil is shifting slowly to the geopolitics. We have had a whole week of headlines starting with Libya," said Amrita Sen, chief oil analyst at London-based consultancy Energy Aspects.
"Seasonally demand is likely to pick up and suddenly you look at these supply disruptions and they make a difference to the balance and they do tighten it up."
Brent crude was up $1.35 cents at $106.30 a barrel at 1350 GMT on Friday, on track to gain just under 2 percent on the week. The contract has rebounded from a weekly low of $101.82 on Tuesday, partly driven by a weaker dollar.
U.S. oil was $1.21 higher at $97.90 a barrel, trading at the highest level in nearly a month, and was also set to rise just under 2 percent on the week.
"Crude oil has been trading in a range for more than a month," Petromatrix analyst Olivier Jakob said.
"With the escalation in Syria, the buying on the dips is probably going to be stronger as the geopolitical premium needs to be increased."
President Barack Obama authorised the shipment of U.S. weapons to Syrian rebels for the first time after the White House said it had proof that the Syrian government used chemical weapons against rebels.
Gains in oil prices accelerated during the session after U.S. data showed producer prices rose more than expected in May but inflationary pressures were still muted, bolstering hopes the monetary stimulus would continue, supporting oil demand. Higher gasoline prices led the gains in prices.
Oil futures have risen in spite of forecasts of "sluggish" demand growth by industry bodies such as the International Energy Agency.
A weaker dollar has supported gains, remaining in the doldrums on Friday after hitting a four-month low against a basket of currencies in early trade.
"Weaker dollar, stronger stocks, more bullish front-end (of the curve)" said an oil trader, listing reasons oil prices were higher on Friday.
In other geopolitical news, millions of Iranians voted to choose between six candidates to replace incumbent president Mahmoud Ahmadinejad, but none is seen as challenging the Islamic Republic's 34-year-old system of clerical rule.
Analysts say the outcome is unlikely to have any short-term impact on oil because any improvement in relations with the West over Iran's nuclear programme will take time to translate into a change in policy.
(Additional reporting by Manash Goswami; editing by David Goodman and Keiron Henderson)