Oil fell more than a dollar toward $68 a barrel on Monday as a rebound in the beaten-down U.S. dollar and nagging concerns that prices may have run ahead of market fundamentals extended last week's late sell-off.

The U.S. currency rallied sharply against a basket of currencies as investors covered short positions following last week's slide of 2 percent to its lowest in a year, fueled by funds flowing into riskier assets such as stocks and commodities and a drop in U.S. Treasury yields.

The dollar's reversal on Monday sent U.S. crude for October delivery tumbling $1.22 to $68.07 a barrel by 0635 GMT (2:35 a.m. EDT), as broader commodity markets once again traded inversely to the greenback.

London Brent crude fell 95 cents to $66.74 a barrel.

Oil fundamentals are unchanged, but the euro is down slightly and crude is down similarly, said Ken Hasegawa, a commodity derivatives sales manager at broker Newedge in Tokyo. But as a trend, we may see dollar weakness for a while.

The dollar index, a gauge of the greenback's performance against six major currencies, rose 0.4 percent to 77.102, off its one-year low of 76.457 struck on Friday.

Oil fell nearly 4 percent toward $69 a barrel on Friday, paring most of its gains earlier in the week, as U.S. equities fell prey to profit-taking following five days of gains, raising concerns about the sustainability of its recent rally and the strength of an economic recovery in the U.S.

With demand still weak, it's not surprising to see some follow-through selling today, said Toby Hassall, a commodities analyst at CWA Pty Ltd in Sydney.

The pre-emptive nature of the oil markets in the past six months may be diminishing as investors now wait for fundamentals to catch up with expectations.

On Monday the CME began tightening up enforcement on existing position limits on NYMEX, in a move that would leave violators open to punishment and could affect the volume of trading on the exchange.

Morgan Stanley has raised its forecast for the price of U.S. crude to $105 a barrel in 2012 from $95 due to tightening spare capacity, the U.S. bank said in a research note seen on Monday.
(Additional reporting by Fayen Wong in PERTH and James Topham in TOKYO; Editing by Clarence Fernandez)