Brent crude fell by as much as 2.2 percent to below $112 as a deepening nuclear crisis in Japan and rising radioactivity levels heightened risk aversion across financial markets.
Japan warned radioactive levels had become significantly higher around the earthquake-stricken Fukushima nuclear power plant after explosions at two reactors on Tuesday, while the French embassy said a low level radioactive wind could reach Tokyo within hours.
April Brent fell $1.98 to $111.69 a barrel at 0726 GMT after trading as low as $111.19. Prices on Monday touched a two-week low of $111.16, down more than 7 percent from a 2-1/2 year high of $119.79 on February 24. U.S. crude for April dropped $2.08 to $99.11.
People are going for risk aversion, so investors are liquidating assets and positions including in crude oil and gold, said Tetsu Emori, a fund manager at Tokyo-based Astmax Co Ltd.
This is just the first reaction after Fukushima, so it's more about sentiment. The nuclear plant issue is an unexpected, very serious additional factor for the market because we don't have any experience on that, Emori said.
As concern about the crippling economic impact of the nuclear and earthquake disasters mounted, Japanese stocks plunged more than 14 percent - heading for their biggest drop since 1987 - compounding Monday's decline. <.T>
The latest speculation that a nuclear cloud is floating toward Tokyo city has terrorized the markets, said Ben Taylor, a trader at CMC Markets.
Further rumors of another flash crash coming has seen value thrown out the window as panic selling sets in across world equity markets.
Oil demand from Japan, the world's third-largest user, may decline in the short term as manufacturing and transport slow, but may rise with increasing need for oil-fired power generation and in the longer term with reconstruction efforts.
Japan's earthquake has left a gaping hole in the nation's power capacity that looks set to last months, threatening to make economic recovery far more feeble than hoped.
SAUDI TROOPS IN BAHRAIN
Oil markets were also eyeing developments in the Middle East, where Saudi Arabia sent troops into Bahrain on Monday to help calm weeks of protests by the Shi'ite Muslim majority, a move opponents of the Sunni ruling family on the island state called a declaration of war.
Unrest has simmered across the Middle East for two months after popular uprisings toppled the leaders of Tunisia and Egypt, while Libya entered a civil war that has cut oil output by at least two-thirds of normal levels.
The protests in top oil exporter Saudi Arabia have been very small, but in neighboring Bahrain the Sunni monarchy is facing rising discontent from the Shi'ite Muslim majority.
Analysts saw the troop movement into Bahrain, home to the U.S. Navy's Fifth Fleet, as a mark of concern in Saudi Arabia that concessions by the country's monarchy could inspire the conservative Sunni-ruled kingdom's own Shi'ite minority.
What's happening in the Middle East is quite important to support the market, but sentiment is affected by what will happen in Japan first and this factor is much bigger in the market, Emori said.
In Libya, Muammar Gaddafi's jets bombed rebels on Monday in a counter-offensive that has pushed them back 100 miles in a week, far outpacing diplomatic efforts to impose a no-fly zone to help the insurgents.
Libya's National Oil Corporation (NOC) has called on employees to return to work at oil installations and is hopeful oil production can soon increase, the head of NOC said on Monday.
On the data front, markets were looking toward weekly U.S. inventory numbers from the industry group American Petroleum Institute later in the day and from the Energy Information Administration on Wednesday.
U.S. crude oil stockpiles probably rose by 1.8 million barrels last week on higher imports and as refinery utilization edged lower as seasonal maintenance continued, a preliminary Reuters poll ahead of the weekly inventory data showed.
(Editing by Himani Sarkar)