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NEW YORK - Oil prices rebounded Tuesday as a rally on Wall Street and the prospect of a large interest rate cut drew buyers back to the futures market.

Retail gas prices, meanwhile, slipped slightly for the second day in a row, while diesel prices rose further above $4 a gallon.

Oil advanced as a rally in the stock market gave investors hope that the economy will weather the credit market problems that forced the Federal Reserve-backed sale of Bear Stearns Cos. to JPMorgan Chase & Co. The Dow Jones industrial average was boosted by better than expected earnings from Bear Stearns competitors Lehman Brothers Inc. and Goldman Sachs Group Inc.

Energy investors often view movements in equities markets as a proxy for the economy's health.

Light, sweet crude for April delivery rose $2.24 to $107.92 a barrel on the New York Mercantile Exchange.

On Monday, oil prices plunged by $4.53 a barrel on concerns that Bear's collapse was a sign of deeper economic problems. That drop marked a rare departure for oil traders from the dollar-driven buying that has sent crude to record levels.

Also boosting oil prices Tuesday were expectations that the Fed will aggressively cut the key federal funds rate Tuesday afternoon as it tries to stave off a severe economic crisis. In the past several months, rate cuts have fed oil price rallies as investors buy crude futures to hedge against inflation and the falling dollar. Also, oil futures are priced in dollars, which makes them cheaper for foreign investors as the greenback falls.

"If recent history is a guide, a (1 percentage) point reduction by the Fed (Tuesday) could result in oil rising to the $114 to $116 range over the course of the next weeks," said Larry Chorn, chief economist at Platts, the energy research arm of McGraw-Hill Cos., in a research note.

However, a smaller rate cut could send oil prices lower; many analysts believe oil investors are banking on a full percentage point cut.

Steve Bellino, senior vice president for energy at MF Global LLC, agrees with many other analysts who feel oil prices aren't supported by the market's underlying supply and demand fundamentals, but thinks oil's Monday swoon was just a correction in a bull market rather than a sign market sentiment is turning.

"The ... market's run is not done yet," Bellino said.

That could be bad news for consumers. Gas prices followed oil futures to a series of records last week, though the national average price of a gallon of gas slid 0.3 cent to $3.28 a gallon Tuesday, according to AAA and the Oil Price Information Service. Prices are 73 cents higher than a year ago, and the Energy Department expects gas to peak near $3.50 a gallon in the spring as suppliers stock up before peak summer driving season. Some analysts see prices rising even higher, to $3.75 or $4 a gallon.

Gas prices are combining with high food prices and a downturn in the housing market to limit consumers' ability to spend, cutting retail sales, and have boosted prices of everything else. But crude's surge has also sent diesel and jet fuel prices climbing, hurting trucking firms and pushing airlines to consider mergers or steep capacity cuts.

Diesel rose 1.3 cents to a new record national average of $4.015 a gallon Tuesday. Delta Air Lines on Tuesday offered buyouts to 30,000 employees, about half its work force, and said it will cut domestic capacity 5 percent this year to cope with soaring fuel prices.

Other energy futures also rebounded Tuesday from steep declines in the previous session. April heating oil futures rose 1.32 cents to $3.0816 a gallon while April gasoline futures rose 8.59 cents to $2.5901 a gallon. April natural gas futures jumped 22.8 cents to $9.328 per 1,000 cubic feet.

In London, May Brent crude futures rose $2.65 to $104.40 a barrel on the ICE Futures exchange.

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