Oil prices sank to six-week lows below $75 a barrel on Friday as fears that Dubai could default convulsed financial markets and the dollar rose as investors moved into safer assets.
U.S. crude for January delivery was $74.42 a barrel by 1445 GMT in electronic trading, having shed $4 at one point, more than 5 percent below Wednesday's settlement.
There was no settlement price on Thursday because U.S. markets were closed for Thanksgiving.
London Brent crude fell $1.35 to $75.65.
Oil reacted in relation to equity markets and a stronger dollar. Some of the exaggeration is coming from lower liquidity on the market because of the holiday, said Harry Tchilinguirian, senior commodity analyst at BNP Paribas.
In terms of fundamentals, nothing has changed in the market. But the knock-on effect of cross-asset movement has increased since the introduction of quantitative easing.
Major U.S. indexes were down 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.
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 global financial crisis.
The Dubai situation is very worrying and people are obviously worried about a potential domino effect if Dubai can't pay off their debt, said Benson Wang, senior adviser at Commodity Broking Services in Sydney.
This is a similar reaction to last year's Lehman Brothers debacle, it shakes confidence in financial markets and raises the specter of contagion, Mike Fitzpatrick at MF Global said in a research note.
The New York Mercantile Exchange will have a shortened floor trading session on Friday.
Traders said Thursday's thin volumes and lack of a U.S. crude settlement could also be exaggerating Friday's oil price move.
Oil prices have fallen about 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.
(Additional reporting by Robert Gibbons in New York and Fayen Wong in Perth; editing by William Hardy)