By Noah Browning and Deep Kaushik Vakil

(Reuters) – Oil slipped on Friday following an earlier price spike of more than $3 after Iran played down reported Israeli attacks on its soil, in a sign that an escalation of hostilities in the Middle East might be avoided.

futures were down 48 cents, or 0.6%, at $86.63 a barrel by 1155 GMT. The most active U.S. West Texas Intermediate contract was down 38 cents, or 0.5%, to $82.35.

Explosions were heard in the Iranian city of Isfahan on Friday in what sources described as an Israeli attack, but Tehran played down the incident and indicated it had no plans for retaliation in a response that could ease concerns about escalation into a region-wide war.

Iran struck Israel with a barrage of drones and ballistic missiles on Saturday in retaliation for a presumed Israeli air strike on April 1 that destroyed a building in Iran’s embassy compound in Damascus and killed several top Iranian officers.

“Whilst the initial spike in oil may have highlighted the initial fear of further escalation, we have seen both equities and crude reverse some of those preliminary moves,” said Joshua Mahony, chief market analyst at Scope Markets.

“Events of the past week appear to be more about showing their willingness to act rather than actually seeking to incite a war …For markets this is a best case scenario”.

Investors had been closely monitoring Israel’s reaction to the April 13 Iranian drone attacks and have been gradually unwinding oil’s risk premium this week.

Prices have fallen more than 4% since Monday and are set for their biggest weekly loss since early February.

“The oil market is nonetheless concerned as there is too much oil supply at stake,” said Bjarne Schieldrop, commodities analyst at SEB Research.

Meanwhile, U.S. lawmakers have tucked sanctions on Iran’s oil exports into a pending Ukraine aid package which targets ships, ports or refineries that process Iranian crude and transactions from Chinese financial institutions involving purchases of petroleum from Iran.

Iran is the third largest oil producer in the Organization of the Petroleum Exporting Countries (OPEC), according to Reuters data.

The U.S. also announced sanctions this week on Iran targeting its unmanned aerial vehicle production.