Oil edged above $66 a barrel on Monday, rebounding after an earlier decline which extended last week's 8.4 percent slide, as the dollar lost ground and stock markets moved higher.

The dollar gave up most of its earlier gain against a basket of currencies, boosting the appeal of oil and commodities to investors. European stocks firmed and U.S. equities made early gains.

It's making some progress back up, said Rob Montefusco of Sucden Financial. At the same time, we haven't seen demand pick up and we need that to draw strength back into this sector at the moment.

U.S. crude was up 24 cents to $66.26 a barrel by 1357 GMT (9:57 a.m. EDT), after earlier falling as far as $65.41. London Brent was up 1 cent to $65.12.

Iran test-fired a type of missile on Monday which defense analysts have said could hit Israel and U.S. bases in the Gulf region, state television reported.

Tensions over Tehran's nuclear program have supported oil prices in recent years. The country is the second-largest oil producer in the Middle East.

In late 2008, Iran threatened to block the Strait of Hormuz, through which about 40 percent of the world's globally traded oil passes, when tensions rose in another row with the United States around the nuclear work.

Even so, sluggish oil demand, reinforced by some lackluster economic data from the United States last week, continued to command investors' attention.

The Iranian situation is not having much influence. If it was, we'd be back toward $70 again, said Christopher Bellew, a broker at Bache Commodities in London.

Oil prices posted their largest weekly decline in around 2-3 months last week, pressured by government data showing U.S. crude oil inventories had risen, suggesting demand remains weak.

U.S. durable goods orders dropped by the largest amount in seven months while a rise in new home sales was less than forecast, according to data from the U.S. Commerce Department on Friday.

(Additional reporting by Fayen Wong in Perth; Editing by William Hardy)