NEW YORK (Reuters) - Oil prices soared nearly 16 percent to over $120 a barrel on Monday -- the biggest one-day gain on record -- in a rally sparked by the expiry of the front-month futures contract and weakness in the U.S. dollar.

The gains extend oil’s climb from a low near $90 last week after the United States unveiled a sweeping rescue plan for its battered financial sector, improving the outlook for energy demand in the world’s biggest consumer nation.

U.S. crude for October delivery, which expires on Monday, settled up $16.37, or 15.7 percent, at $120.92 per barrel. The contract for delivery in November, which was much more actively traded, was up only $6.62 at $109.37.

London Brent crude settled up $6.43 at $106.04.

“The market went crazy here and it looks like the weakness of the dollar was a fuel for the sharp price increase. NYMEX October crude was also expiring and that provoked short-covering,” said Amanda Kurzendoerfer, commodities analyst at Summit Energy in Louisville, Kentucky.

The U.S. dollar fell 2 percent against the euro on Monday, weighed down by worries about the fiscal impact of the U.S. government’s $700 billion bailout plan aimed at addressing the global credit crisis.

A weaker dollar boosts the purchasing power of commodity buyers using other currencies.

The U.S. government measures to rescue the financial system also have restored confidence that U.S. fuel demand may hold up to economic turmoil better than initially feared.

“The key driver continues to be the U.S. rescue package, which has changed the sentiment in the oil market,” said Bank of Ireland analyst Paul Harris.

Since hitting record highs above $147 a barrel in mid-July, oil prices had tumbled as evidence mounted that high energy costs and economic woes were undercutting global fuel demand. U.S. oil demand is running about 4 percent below last year, according to the latest government data.

The slow recovery of the U.S. oil sector after Hurricane Ike also supported prices on Monday, after causing the biggest disruption to the nation’s energy supplies since 2005.

Nearly 80 percent of oil production in the U.S. Gulf of Mexico, home to a quarter of all U.S. oil output, remained shut along with seven refineries.

Oil prices also were supported by news China increased crude imports 11.54 percent in August from a year earlier, recovering from a steep July fall, the General Administration of Customs said on Friday, confirming earlier data.

“The Chinese import news is a sign of recovery, and a good indication that oil prices could get back up again,” said Christopher Bellew of Bache Financial.

Industry sources also said top oil exporter Saudi Arabia has trimmed oil supplies to major international oil companies and U.S. refiners since the start of September.