Oil dropped nearly 4 percent to below $69 a barrel on Wednesday after U.S. government data showed a big jump in crude and products stockpiles, stirring concerns about demand in the world's top energy consumer.

The U.S. Energy Information Administration reported commercial stockpiles of crude rose 2.8 million barrels in the week to September 18, against analysts expectations of 1.5 million barrels fall.

Gasoline inventories increased by 5.4 million barrels to 213.1 million, and distillates gained 3.0 million to hit a fresh 26-year high of 170.8 million, according to the EIA.

U.S. crude fell $2.79 to settle at $68.97 a barrel, while London Brent crude fell $2.54 to settle at $67.99 a barrel.

The report reflects the real state of the economy in which demand for refined products is very weak and so supplies are high, said Phil Flynn, analyst at PFG Best Research in Chicago.

Data from the American Petroleum Institute, released late Tuesday, also showed a build in U.S. crude inventories.

The global recession has battered demand in the United States and other big consumer nations, helping to push crude off record highs near $150 a barrel struck in July 2008 to below $33 a barrel in December.

Prices have since rebounded on signs of an economic turnaround, and oil markets are keeping a close eye on equities markets and macroeconomic data in expectation a turnaround would increase fuel consumption.

U.S. stocks rose after the Federal Reserve said economic activity has picked up following a severe downturn, an assessment that suggested the outlook for corporate profits was brightening. <.N>

The Federal Reserve also renewed its pledge to keep rates exceptionally low for an extended period to support a fragile recovery.

The U.S. dollar fell to a fresh one-year low against the euro after the Fed decision.

(Reporting by Rebekah Kebede, Matthew Robinson, Gene Ramos, and Robert Gibbons in New York; Joe Brock in London; Editing by Marguerita Choy)