By Nayera Abdallah, Elwely Elwelly and Idrees Ali
DUBAI/WASHINGTON, May 11 (Reuters) - President Donald Trump's swift rejection of Iran's response to a U.S. peace proposal pushed oil prices higher on Monday, fuelling concerns that the 10-week-old conflict will drag on and continue to paralyse shipping through the Strait of Hormuz.
Days after Washington floated an offer aimed at reopening negotiations, Iran on Sunday released a response focused on ending the war on all fronts, including Lebanon, where U.S. ally Israel is fighting Iran-backed Hezbollah militants.
Tehran also demanded compensation for war damage, emphasised its sovereignty over the Strait of Hormuz, and called on the United States to end its naval blockade, guarantee no further attacks, lift sanctions and remove a ban on Iranian oil sales.
Within hours, Trump dismissed the proposal in a social media post.
"I don't like it — TOTALLY UNACCEPTABLE," Trump wrote on Truth Social, without giving further detail.
The U.S. had proposed an end to fighting before starting talks on more contentious issues, including Iran's nuclear programme.
Tehran responded on Monday by defending its stance.
"Our demand is legitimate: demanding an end to the war, lifting the (U.S.) blockade and piracy, and releasing Iranian assets that have been unjustly frozen in banks due to U.S. pressure," Foreign Ministry spokesperson Esmaeil Baghaei said.
"Safe passage through the Strait of Hormuz and establishing security in the region and Lebanon were other demands of Iran, which are considered a generous and responsible offer."
Oil prices surged by $4 a barrel on Monday, before slipping back slightly, as the deadlock left the Strait of Hormuz largely closed. Before the war began on February 28, the narrow waterway carried one-fifth of the world's oil and liquefied natural gas, and has since become a central pressure point in the conflict.
TRICKLE OF SHIPPING THROUGH HORMUZ
Traffic through the strait is at a trickle compared to before the war. Shipping data on Kpler and LSEG showed that three tankers laden with crude exited the waterway last week, with trackers switched off to avoid Iranian attack.
Sporadic flare-ups around the strait in recent days have tested a ceasefire that has paused all-out warfare since it took effect in early April.
In the United States, surveys show the war is unpopular with voters facing sharply higher gasoline prices less than six months before nationwide elections that will determine whether Trump's Republican Party retains control of Congress.
Washington has also struggled to build international support, with NATO allies refusing to send ships to reopen the waterway without a full peace deal and an internationally mandated mission.
Hakan Fidan, the foreign minister of Turkey, which has been in close contact with the U.S., Iran and mediator Pakistan since the start of the war, will visit Qatar on Tuesday for talks on the conflict and on ensuring navigational safety in the strait, a Turkish diplomatic source said on Monday.
TRUMP SET TO DISCUSS IRAN IN BEIJING
The next diplomatic or military steps remain unclear. Trump is expected to arrive in Beijing on Wednesday, where Iran is set to be among the topics discussed with Chinese President Xi Jinping as pressure mounts to end the conflict and the energy crisis it has triggered.
Trump has been leaning on China to use its influence to push Tehran toward a deal with Washington.
Baghaei suggested China could instead use the visit to push back against U.S. objectives in the Gulf. "Our Chinese friends know very well how to use these opportunities to warn about the consequences of the U.S.' illegal and bullying actions on regional peace and security," he said.
Addressing whether combat operations against Iran were over, Trump said in remarks aired on Sunday: "They are defeated, but that doesn't mean they're done."
Israeli Prime Minister Benjamin Netanyahu said the war was not over because there was "more work to be done" to remove enriched uranium from Iran, dismantle enrichment facilities and address its proxy forces and ballistic missile capabilities.
Netanyahu told CBS News' "60 Minutes" that the preferred route was diplomacy, but he did not rule out the use of force.
Iranian President Masoud Pezeshkian said in a social media post that Tehran would "never bow down to the enemy" and would "defend national interests with strength".
Despite the ongoing diplomatic efforts, risks to shipping lanes and regional economies remain high.
On Sunday, the United Arab Emirates said it intercepted two drones launched from Iran, while Qatar condemned a drone strike on a cargo ship in its waters. Kuwait reported that its air defences had dealt with hostile drones entering its airspace.
Clashes have also continued in southern Lebanon between Israel and Hezbollah, despite a U.S.-brokered ceasefire announced on April 16.
(Reporting by Reuters Newsrooms; Writing by Ann Saphir, Lincoln Feast and William Maclean; Editing by Kate Mayberry, Ros Russell and Gareth Jones )
