UPDATE 6-Oil retreats after surge to 2-yr peak above $90

                                
 * Dollar pares losses, helps pull crude back from high
                                
 * Uncertainty about tax compromise passage weighs on oil
                                
 * European/U.S. cold weather supportive to oil
                                
 * Coming up: API oil data, 4:30 p.m. EST Tuesday
                                
 (Recasts, updates prices, market activity; new byline,
changes dateline, previously LONDON)
                                
 By Robert Gibbons
                                
 NEW YORK, Dec 7 (Reuters) - Oil fell on Tuesday as the
dollar bounced up off its lows and investors turned cautious,
taking profits on an early rise in crude futures to a 26-month
peak above $90 a barrel.
                                
 After a deal struck by U.S. President Barack Obama with
Republicans to extend Bush-era tax cuts helped boost U.S.
equities and oil, uncertainty emerged about the plan's passage,
pressuring oil prices.
                                
 Heating fuel demand stoked by cold weather in Europe and
the United States helped lift crude oil prices, along with
optimism that Ireland will pass an austerity budget, which
boosted the euro against the dollar.
                                
 U.S. crude for January delivery <CLc1> fell 87 cents to
$88.51 a barrel at 12:53 p.m. EST (1753 GMT), having retreated
from an earlier $90.76 peak, the highest intraday front-month
price since October 2008.
                                
 ICE Brent crude for <LCOc1> fell 65 cents to $90.80 a
barrel, slipping from an early $92.86 peak.
                                
 "Crude pushed above $90, but lost momentum and the more
nervous longs probably took a little profit," said Gene
McGillian, analyst at Tradition Energy in Stamford,
Connecticut.
                                
 "The fundamentals are still not spectacular and that may
make investors cautious. But if equities stay strong and the
dollar weak, that may attract buyers back into crude,"
                                
 The euro surrendered early gains against the dollar as
optimism about an Irish budget was overshadowed by broader
worries about the European Union's ability to stem debt
problems from spreading. [USD/]
                                
 U.S. House of Representatives Majority Leader Steny Hoyer
on Tuesday did not rule out backing the tax-cut deal negotiated
by President Obama, but said he was undecided. [ID:nWEN4024]
                                
 House Speaker Nancy Pelosi said talks with President Obama
would continue in coming days, as Democrats balked at major
components of a possible compromise bill. [ID:nWEN4025]
                                
 "I think the tax deal was part of the rally early, but if
questions remain about passage of the deal they could cause
traders to give up on the long side," said Tom Bentz, broker at
BNP Paribas Commodity Futures Inc in New York.
                                
 Also stoking investor caution was a report in an official
newspaper saying that China's central bank may raise interest
rates this weekend to emphasize its shift to a "prudent"
monetary policy in the face of rising inflation.
[ID:nTOE6B6003]
                                
 COLD WEATHER LIFT
                                
 Temperatures in Europe's main heating hub of the northwest
were expected to stay below seasonal norms over the next 10
days, according to private forecaster DTN Meteorlogix, boosting
gas oil demand and prompting utilities to switch on oil-fired
power plants. [ID:LDE6B613C]
                                
 Heating demand in the United States was expected to be 16.3
percent above normal in the week to Dec. 11, according to the
U.S. National Weather Service. [ID:nN07DD]
                                
 "The market is reacting to the very cold weather in Europe
and it's expecting to see an impact on heating oil ... it's a
knee-jerk reaction," said Roy Jordan, oil analyst at Facts
Global Energy.
                                
 News that German manufacturing orders rose in 1.6 percent
in October added to support for oil. [ID:nLDE6351EI]
                                
 INVENTORY REPORTS
                                
 Investors will watch weekly oil inventory reports for
evidence that improving demand is helping lower bulging U.S.
inventories.
                                
 U.S. crude oil stocks were expected to have fallen 1.5
million barrels last week and distillates by 400,000 barrels,
according to a preliminary Reuters analyst survey on Monday.
[ID:nN06226217]
                                
 The industry group the American Petroleum Institute's
report is due for release on Tuesday at 4:30 p.m. EST (2130
GMT), followed by government statistics from the Energy
Information Administration on Wednesday.
                                
 The Organization of the Petroleum Exporting Countries meets
on Dec. 11, with oil ministers expected to keep existing supply
targets.
 (Additional reporting by Gene Ramos in New York, Emma Farge in
London and Alejandro Barbajosa in Singapore; Editing by David
Gregorio)