Brent crude fell below $110 a barrel for the first time in nearly three weeks on Tuesday as a deepening nuclear crisis in Japan and rising radioactivity levels heightened risk aversion across financial markets.

There was panic buying in Tokyo after explosions at two nuclear reactors sent a low-level radioactive wind toward the capital, although officials said radiation levels at the stricken Fukushima Daiichi nuclear complex had fallen after an earlier spike.

April Brent fell $2.81 to $110.86 a barrel at 1044 GMT after trading as low as $109.90. U.S. crude for April dropped $2.62 to $98.57 after earlier slipping to $97.81.

It's a combination of uncertainty and risk aversion, said Commerzbank analyst Eugen Weinberg.

It's not really fundamental concerns that Japan, one of the largest oil consumers, will be missing over the next few months. It's more sentiment that is depressing the prices of risk assets such as equities and commodities.

At one point, Japanese stocks plunged more than 14 percent, heading for their biggest drop since 1987 as concerns grew over the economic impact of the unfolding disaster <.T>

Oil demand from Japan, the world's third-largest user, is likely to decline in the short term as manufacturing and transport slow but could then rise as the country seeks to replace nuclear with oil-fired power during reconstruction.

The International Energy Agency (IEA) said on Tuesday global oil demand was likely to be lower than previously forecast in 2011 as a result of a price shock and trimmed its forecast by 10,000 barrels to 1.44 million barrels per day.

SAUDI TROOPS IN BAHRAIN

Oil markets were also keeping a close eye on developments in the Middle East, where Saudi Arabia sent troops into Bahrain on Monday to help calm weeks of protests by the Shi'ite Muslim majority.

Opponents of Bahrain's Sunni ruling family called the move a declaration of war, while Iran denounced it as unacceptable and the United States urged its nationals to leave the island, which is home to the U.S. Navy's Fifth Fleet.

The oil market is eyeing both developments in the Middle East and in Japan, said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas.

While the tensions in the Middle East represent upside risk to oil prices, the disruption to activity in Japan, and regionally through trading its trading ties with China, is leading oil prices lower for now.

In Libya, Muammar Gaddafi's jets bombed rebels on Monday in a counter-offensive that has pushed them back 100 miles in a week, far outpacing diplomatic efforts to impose a no-fly zone to help the insurgents.

On the data front, markets were looking toward weekly U.S. inventory numbers from industry group American Petroleum Institute. A Reuters poll indicated U.S. crude oil stockpiles probably rose by 1.8 million barrels last week.

(Additional reporting by Alejandro Barbajosa and Ikuko Kurahone, editing by Anthony Barker)

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