* Banks, pension funds support Greece's bond swap offer
* Iran in focus, worries about supply when sanctions hit
* ECB rate decision at 1245 GMT, news conference 1330 GMT (Adds comment para 6-7, adds dollar index, updates prices)
By Zaida Espana
LONDON, March 8 (Reuters) - Oil rose on Thursday, with prices topping $125 a barrel, on hopes that Greece would win enough creditor support to avoid a messy default on its debt and on continuing fears of supply disruptions from Iran.
Crude recovered from losses earlier in the week after a Greek government official said its bond swap offer was going well as banks and funds showed support, spurring optimism that the deal will pass and clear the way for a bailout package to avert an immediate default.
Front-month Brent climbed $1.13 to $125.25 a barrel by 1047 GMT, having touched earlier intra-day highs of $125.58. U.S. crude was up 76 cents at $106.92 a barrel, off slightly from earlier highs of $107.16.
"Greece has certainly lent support to the euro, that in turn has spurred commodities, specially the dollar-denominated commodities to rally or certainly stabilise," said Tony Machacek, an energy broker at Bache Commodities.
Analysts noted Greece would likely remain a source of uncertainty for markets ahead of a 2000 GMT deadline for investors to sign up to the restructuring designed to trim 100 billion euros off the country's public debt.
"An agreement over the Greek bond swap will be a key driver, indirectly impacting oil price through the foreign exchange markets and how the dollar will move against the euro," BNP Paribas' head commodities strategist Harry Tchilinguirian said. "For now, sentiment is positive and the dollar is pulling back a little, supporting higher oil prices this morning."
The dollar index was down 0.37 percent by 1048 GMT. A weaker dollar helps make greenback-denominated commodities such as oil and gold more accessible to buyers in other currencies.
The European Central Bank is expected to keep interest rates on hold later today and signal that it has played its part in fighting the euro zone debt crisis after unleashing a dramatic sweep of measures that has unsettled some at the bank.
Investors were still focused on the tensions over Iran's nuclear programme, which have driven recent oil gains. Political risk in the Middle East has increased significantly with war between Iran and Israel almost inevitable, Swiss money manager and long-term bear Marc Faber said.
France on Wednesday voiced scepticism that a revival of talks between six world powers and Iran would succeed, saying Tehran did not seem sincerely willing to negotiate about the future of its nuclear programme.
Supply tightness could become more apparent as Royal Dutch Shell starts looking for alternative crude when its deliveries of Iranian oil under outstanding contracts come to an end to comply with sanctions within weeks.
Economic data also helped, with news that Japan's economy shrank less than initially estimated in the fourth quarter, as companies ramped up spending, supporting oil prices. The revision to GDP showed a 0.2 percent contraction as companies look to an increase in demand due to reconstruction of the country's tsunami-battered northeast coast.
In the United States, data on Wednesday showed an accelerated pace of job creation in the private sector in February, raising optimism about Friday's government employment report for that month.
The private sector added 216,000 jobs last month, according to the ADP National Employment Report, topping economists' expectations for a gain of 208,000, and raising hopes the labour market recovery was moving at a faster clip.
On Friday, the U.S. will issue more comprehensive private and public sector employment data for February. Economists polled by Reuters expect a gain of 210,000 in nonfarm payrolls, with a rise in the private sector of 225,000 jobs offsetting a modest dip in government jobs. (Reporting by Zaida Espana; editing by Erica Billingham and Keiron Henderson)
