Oil fell 2 percent to below $70 a barrel on Tuesday after a drop in U.S. consumer confidence data in May added to concerns over a potential economic rebound.
Major stock market indexes also turned lower and the dollar rose after the Conference Board's consumer confidence index showed households felt worse about their situation, fueling a bout of risk aversion.
Other gloomy economic data showed the British economy shrank at its fastest pace in more than 50 years in the first three months of 2009 and has been in recession for a whole year.
In addition, jobless rates in No. 3 oil consumer Japan rose to a new 5-1/2-year high in May and job availability sank to a record low, further damping hopes for an economic recovery.
U.S. crude settled down $1.60 at $69.89 a barrel, after earlier rising to an eight-month high of $73.38. London Brent gave up $1.69 to settle at $69.30 a barrel.
The consumer confidence number really seemed to reverse momentum, said Phil Flynn, analyst at PFGBest Research in Chicago.
It's before July 4th (U.S. holiday) weekend and it got the market scared everyone is going to stay home and not drive. When the market gets concerned about the economy, people run back to the dollar to avoid risk.
The U.S. dollar rose against the euro, weighing on commodities denominated in the greenback, with the Reuters-Jeffries CRB index <.CRB> commodity benchmark trading down 1.70 percent on Tuesday afternoon.
Driven by hopes of a global economic recovery, oil prices are on track to post a near 50 percent increase in the second quarter, the highest quarterly percentage gain since 1990.
Earlier, oil prices surged on unusually high Asian trading volumes, which some traders attributed to big fund players in the market.
Oil markets were also awaiting U.S. inventory data from the American Petroleum Institute, due Tuesday afternoon, expected to show a draw in crude stockpiles and a build in product inventories as the world's top consumer heads into the July 4 holiday weekend.
A revised Reuters poll of analysts ahead of weekly data estimated U.S. crude stockpiles fell by 2.o million barrels last week, while gasoline stocks were seen up 1.9 million barrels and distillate stocks up 1.5 million barrels.
The U.S. Energy Information Administration will release its weekly inventory report on Wednesday.
(Reporting by Matthew Robinson, Robert Gibbons, and Gene Ramos in New York; Joe Brock in London; Editing by John Picinich)