Oil prices dropped over 2 percent to nearly $76 a barrel on Friday as fears of possible defaults in Dubai convulsed financial markets and boosted safe-haven demand for the U.S. dollar.

U.S. crude for January delivery fell $2.08 to $75.88 a barrel by 11:51 a.m. (1651 GMT), 2.7 percent below Wednesday's settlement, after hitting a low of $72.39 a barrel.

U.S. markets were closed on Thursday for the Thanksgiving holiday.

London Brent crude rose 17 cents to $77.16 from Thursday's settlement price.

Crude oil markets have looked to wider macro-economic data and equities markets for signs of an economic recovery that could lift oil demand.

Dubai has asked for a debt standstill on tens of billions of dollars as part of a restructuring, sparking debt default fears that could hit other parts of the global economy and derail a fledgling recovery from 2008's financial crisis.

Obviously, the markets are being roiled by the Dubai news this morning. This is a similar reaction to last year's Lehman Brothers debacle, it shakes confidence in financial markets and raises the specter of contagion which could trigger a second wave in the credit crisis, Mike Fitzpatrick, vice president at MF Global in New York, said in a Friday research note.

Major U.S. indexes dropped after markets opened on Friday, the NASDAQ <.IXIC> falling nearly 3 percent and the S&P 500 down 17.98 points, or 1.62 percent to 1.092.65. Investors began seeking refuge in government bonds.

For a graphic on risk assets hit by Dubai dect fears, click on:


The U.S. dollar also pressured oil prices as concerns about the possibility of a debt default in Dubai boosted safe-haven demand for the greenback.

A stronger dollar weighs on demand for commodities such as oil that are denominated in the U.S. currency.

Oil prices could be at the mercy of the renewed financial pessimism till further clarity on the Dubai situation emerges, Amrita Sen, a commodities researcher with Barclay's Capital said in a note Friday.

Oil prices have fallen nearly 10 percent since striking a year high of $82 early last month, as lackluster economic data and bulging fuel inventories in the United States combine to dent hopes of a swift recovery in energy demand.

Traders said thin volumes on Thursday and Friday due to the Thanksgiving holiday could also be exaggerating Friday's oil price move.

The New York Mercantile Exchange will have a shortened floor trading session on Friday.

(Additional reporting by Robert Gibbons in New York, Chris Baldwin in London, and Fayen Wong in Perth; editing by Marguerita Choy)