NEW YORK (Reuters) - Oil prices jumped six percent yesterday as traders sought to square their books ahead of the expiry of the February US futures contract.

US February crude, which expired on yesterday, settled up $2.23 at $38.74 a barrel, while March crude fell $1.73 to $40.84 a barrel. London Brent fell 88 cents to settle at $43.62 a barrel.

"There's a short-squeeze play going on ahead of February crude's expiration as there are still some traders heavy with shorts on this last trading day for the contract," said Phil Flynn, an analyst at Alaron Trading in Chicago.

"The market is also filling the gap between the February and March contract, one activity which we saw in the last two contract expirations, and so we are seeing a narrowing of the February/March contract."

Slumping demand in the US and Europe has helped send crude prices down from record highs above $147 a barrel in July, prompting the Organisation of Petroleum Exporting Countries to agree to a series of output cuts aimed at balancing the market and supporting prices.

Kuwait has informed all customers of cuts in oil supply in line with Opec's December decision to reduce supply, state oil company Kuwait Petroleum Corp said. Opec's new president Botelho de Vasconcelos told Reuters the group was fully enforcing its deepest ever supply curbs, adding that the cartel was unlikely to meet before its next scheduled meeting in Vienna in March.