Oil fell nearly $2 to below $87 a barrel on Monday as financial markets tumbled on growing concerns over the health of the U.S. economy, triggering a correction from recent record highs.

At 11:32 a.m. EDT, U.S. crude was down $1.69 at $86.91 a barrel, off lows of $86.17, retreating further from the $90.07 all-time high it hit last Friday.

London Brent crude was $1.25 lower at $82.56.

Profit taking was in evidence across commodities, as gold and other metals fell sharply. The dollar bounced back from a record low against the euro, as European and Asian stocks fell sharply after a flurry of weak U.S. corporate results sparked concerns the world's top economy was heading for a recession.

On Wall Street, U.S. stocks extended losses after falling by 367 points on Friday, the biggest fall in two months.

U.S. oil has rallied more than 10 percent since October 8, climbing towards the inflation-adjusted high of $101.70 hit in April 1980, a year after the Iranian revolution.

A weak dollar and surging energy costs have increased worries over the health of the U.S. economy, already battered by the crisis in the subprime mortgage sector.

Despite oil's slide from last Friday's all-time high, analysts said confrontation between Turkey and Kurdish rebels in northern Iraq continued to offer underlying support, although signs of a possible lessening in tensions emerged on Monday.

The Kurdish rebels fighting Turkish troops near the Iraqi border will announce a ceasefire on Monday evening, Iraqi President Jalal Talabani's office said.

Turkey had vowed on Sunday to take tough action after the rebels killed 17 of its soldiers.

News Iran's chief nuclear negotiator had resigned also raised concerns of more instability in the Middle East. Analysts say the man named to replace Ali Larijani could present the West with a harder line in a long-running dispute over Tehran's atomic ambitions.

Kuwait's acting oil minister said on Monday geopolitics and a lack of refining capacity was behind a surge in world oil prices and that a 500,000-barrels per day (bpd) output increase already agreed by OPEC would positively affect the market.

We think that the production rise by 500,000 bpd will affect positively (the price), Mohammad al-Olaim told reporters on the sidelines of an oil conference.

It is in our interest that the price is appropriate for consumers and producers.

However, others contend OPEC's output increase from November 1 is too little and too late.

To bring the oil price down from its current level, OPEC's members need to put more oil onto the market and allow commercial inventories to be replenished, the London-based Centre for Global Energy Studies said in a report.

Meanwhile, speculators on the New York Mercantile Exchange crude oil market increased their net long positions in the week to October 16 as part of the rally that sent prices to a record $90 a barrel.

Crude longs rose to 87,988, the highest level since mid-August, from 69,190.

Analysts said the continued rise in the size of speculative net long positions made oil vulnerable to a correction.

The growing size of un-hedged positions in the market is a source of downside price risk, albeit strong underlying fundamentals should act to limit the extent of any potential correction, Barclays Capital said.

(Additional reporting by Fayen Wong in Sydney)