Oil fell toward $72 a barrel on Monday, as a drop in China's key stock index stoked worries about the country's economy, but hopes that energy demand would soon rebound are on track to push prices up about 4 percent in August.

Oil prices slipped 1.56 percent last week but are set to chalk up gains of 4.13 percent in August, as a raft of upbeat economic data across the globe helped offset high U.S. oil inventory levels.

U.S. crude for October delivery fell 33 cents to $72.41 a barrel by 12:02 a.m. EDT, erasing the previous session's gains of 25 cents.

London Brent crude fell 45 cents to $72.34 a barrel.

The sharp drop in Chinese markets is causing concerns and is inevitably making some investors rethink on the risks to China's economy and question their assumptions on the country's growth rate and energy consumption, said Daniel Liu, a commodities strategist at MG Global Singapore.

The Shanghai Composite Index <.SSEC> plunged as much as 5.4 percent to a three-month low of 2,706.129 points on Monday, breaking below the key 125-day moving average used by Chinese investors to delineate a bull from a bear market.

Jitters about the Chinese economy also weighed on other Asian stock markets, with the MSCI index of Asia-Pacific stocks traded outside Japan <.MIAPJ0000PUS> falling 1.4 percent.

Earlier in the day, oil had risen amid growing optimism about a global economy recovery, with positive data from Japan adding to the ebullience.

Industrial output in Japan, the world's No. 3 energy consumer, rose 1.9 percent in July to increase for a fifth straight month as exports recovered on the back of stimulus spending around the world, and the pace of rise is expected to accelerate in the coming months.

Qatar's Oil Minister Abdullah al-Attiyah said on Sunday that OPEC was likely to keep oil output targets unchanged when it next meets in September, echoing separate comments by a senior Gulf OPEC delegate that the decision was made on expectations for demand to strengthen over winter on the back of a global economic recovery.

In a sign that OPEC producers are beginning to ease supply restraints, Abu Dhabi will lift its crude oil supplies to Asian refiners in October versus the previous month, the state oil firm said on Saturday.

On the weather front, Hurricane Jimena blew into a dangerous Category 4 storm off Mexico's Pacific Coast and was on track to hit resorts on the Baja California peninsula on Tuesday, although there were no threats to oil rigs.

Separately, Iran has slowed its expansion of uranium enrichment and met some demands for transparency but allegations it researched how to build atom bombs looked credible and the U.N. atomic watchdog said Tehran had to address them.

(Reporting by Fayen Wong; Editing by Clarence Fernandez)