Oil fell toward $79 a barrel on Thursday, after a steep decline in U.S. crude inventories sent prices up 1 percent the previous day, as traders look to the fall in equities markets and firming dollar to take profits.

The U.S. dollar inched up as short-term investors sold into a rally in the euro and higher-yielding currencies such as the Australian dollar, following a repeated pledge by the U.S. Fed to keep rates low for a while.

U.S. crude for December fell 71 cents to $79.69 a barrel by 0638 GMT (1:38 a.m. EST), after settling up 80 cents on Wednesday.

London Brent crude lost 71 cents to $78.18 a barrel.

Today the market is down a little bit as we get a bit of a correction, after two days of fairly big gains, said Tony Nunan, risk manager at Tokyo-based Mitsubishi Corp.

Crude oil futures rose above $81 a barrel on Wednesday after the U.S. government Energy Information Administration (EIA) data showed a big drop of 4 million barrels, in the week to October 30, versus analysts' expectations for an increase.

Gasoline stockpiles also fell, down 300,000 barrels, against forecasts for a slight build, while distillates dropped a less-than-expected 400,000 barrels, the EIA said.

Traders said the fall in oil prices on Thursday was driven by the weak stock markets in Asia, with Japan's Nikkei average <.N225> down 1.3 percent and Hong Kong's Hang Seng index <.HSI> retreated a nearly 1 percent.

The equities markets are moving oil prices, said Soichi Okuda, chief economist at Sumitomo Shoji Research Institute.

Energy traders have closely watched economic data and share markets this year for signs of economic recovery that could boost flagging oil demand.

Wall Street initially rallied after the Federal Reserve said it would keep rates near zero for an extended period even as it expressed confidence in the recovery, but soon lost steam as investors turned their eyes to jobs data due out on Friday.

U.S. employers in October cut payrolls by the least amount in 14 months as the economy's resumption of growth boosted optimism, but the jobless rate rose to a fresh 26-year high, a Reuters survey predicts.

(Editing by Sanjeev Miglani)