Oil dropped more than 3.5 percent to near $69 a barrel on Wednesday after U.S. government data showed a surprise jump in crude and products stockpiles, which stirred concerns about demand in the world's top energy consumer.

The U.S. Energy Information Administration's data showed 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 rose 5.4 million barrels to 213.1 million, and distillates rose 3.0 million to a fresh 26-year high of 170.8 million, according to the EIA.

U.S. crude fell $2.59 to $69.17 a barrel by 1:03 p.m. EDT. London Brent crude fell $2.42 to $68.11 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.

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, with oil markets keeping a close eye on equities markets and macroeconomic data.

U.S. stocks edged lower, weighed down by the fall in crude prices as investors awaited a policy statement from the U.S. Federal Reserve. <.N>

The dollar came off a near one-year low on Wednesday ahead of a Federal Reserve policy announcement later in the day, adding pressure to oil prices. Oil had had been spurred on by the falling dollar prior to the inventory reports.

Oil prices were already lower prior to the release of EIA data after a report from the American Petroleum Institute release late Tuesday also showed a surprise crude inventory build.

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