Crude prices broke a six-day rally on Wednesday after Iran's threat to stop the flow of oil from the Gulf was written off as no more than rhetoric, while a strong short-term Italian debt sale eased stress in European markets.
Tehran said on Tuesday it would stop oil transiting through the Strait of Hormuz if sanctions were imposed on its crude oil exports because of its nuclear ambitions. Washington said it saw an element of bluster in the threat.
Brent fell 0.9 percent to $108.28 a barrel by 1150 GMT after climbing more than a dollar in the previous session. Prices have surged over 5 percent since December 16.
European shares reversed early losses to add 0.5 percent <.FTEU3>, while Asian stocks slipped, leaving the MSCI world equity index <.MIWD00000PUS> flat on the day. Futures pointed to a slightly lower open on Wall Street.<.N>
The threat by Iran to close the Strait of Hormuz supported the oil market yesterday, but the effect is fading today as it will probably be empty threats as they cannot stop the flow for a longer period due to the amount of U.S. hardware in the area, said Thorbjoern bak Jensen, oil analyst with Global Risk Management.
It has been an ugly year for equities outside the United States.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> fell 0.7 percent, keeping it on course for a 2011 loss of 18 percent, underperforming a 12 percent decline in European shares <.FTEU3> and a 9 percent drop in world stocks.
Japan's Nikkei stock average <.N225> ended down 0.2 percent, on track for a 17.6 percent drop this year. <.T>
Naohiro Niimura, a partner at research and consulting firm Market Risk Advisory Co, said the chances of a violent confrontation with Iran were remote for now but added the tensions would be a major source of volatility in 2012 along with the unresolved euro zone debt crisis.
The euro held above an 11-month low against the dollar after Italian short-term debt costs halved at auction, helped by a new government austerity package and cheap liquidity from the European Central Bank.
The country faces the more difficult task of selling long-term debt on Thursday where there will be a greater reliance on international investors to buy 8.5 billion euros of debt with maturities of up to 10 years.
Analysts said market tensions could easily reignite. Italy faces almost 150 billion euros of debt refinancing in February-April alone.
Tomorrow's auction is more important and will give more insight into general sentiment. Today was a warm-up, said Neil Mellor, currency strategist at Bank of New York Mellon.
The euro was last marginally higher on the day at $1.3071.
Safe-haven German Bund futures were barely changed while yields on Italian 10-year bonds dropped to 6.8 percent, just below the 7 percent rate that is widely seen as unsustainable in the long term for the country's finances.
Banks deposited a record 452 billion euros ($538 billion) at the European Central Bank overnight, giving no sign that interbank lending is reviving, although the nearly half a trillion euros of 3-year liquidity handed out by the ECB last week pushed bank-to-bank lending rates lower.
In the United States, data suggested the economy was on track for a moderate recovery, with improving labor market conditions lifting U.S. consumer confidence to an eight-month high in December although U.S. single-family home prices fell more than expected in October.
Wall Street ended flat on Tuesday following a five percent rally last week which pushed the S&P 500 into positive territory for the year.
Gold edged lower, tracking falls in industrial metals and equities.
The 19-commodity Reuters-Jefferies CRB index <.CRB> -- largely influenced by U.S. crude oil -- is set for a 7 percent drop in 2011, faring slightly better than equities.
U.S. crude oil has been among the best performers this year with a 10 percent increase, while gold has gained 12 percent as a loss of confidence in the euro zone accelerated investor flight to bullion.
(Additional reporting by Valentina Za in Milan, Nia Williams and William James in London, Chikako Mogi in Tokyo, editing by John Stonestreet)