Oil fell 5 percent on Thursday in the steepest daily drop since July and the fifth-largest trading volumes ever on the New York Mercantile Exchange as investors dumped commodities and other risky assets.
Rising U.S. unemployment claims and fear that debt-laden European economies may falter exacerbated the selling.
Several traders and brokers at different firms said they suspected the sell-off in crude was also linked to a hedge fund quickly unloading a big oil position.
More than 496 million barrels worth of front-month NYMEX crude futures changed hands -- representing enough oil to meet global demand for six days -- as volumes spiked in afternoon trade, according to Reuters data.
U.S. crude for March delivery settled down $3.84 a barrel to $73.14, a drop of 5 percent for the day, the largest percentage decline since July 29. London Brent fell $3.79 to settle at $72.13 a barrel.
The dollar firmed to a seven-month high against the euro as investors shunned risky assets amid fears over the fiscal health of European economies including Greece, Portugal and Spain.
European Central Bank President Jean-Claude Trichet said Europe's economic recovery could be uneven and subject to uncertainty.
The number of U.S. workers filing initial jobless claims rose to a more-than-expected 480,000 last week, the Labor Department said.
The economic concerns pushed gold to its single largest daily fall since 2008 while the Dow Jones Industrial Average briefly fell below the crucial 10,000 mark as stocks suffered their worst losses in more than nine months.
The Reuters-Jefferies CRB index <.CRB>, which tracks 19 mostly U.S.-traded commodity futures, saw its biggest daily loss in nearly six months.
Oil has dropped more than $11 a barrel since closing at a 15-month high above $84 on January 11, fueled in part by weak demand and rising inventories in the United States and other developed economies.
The underlying fundamentals are coming back to haunt us now, and oil is falling, said Gene McGillian with Stamford, Connecticut-based Tradition Energy. Unemployment numbers were worse than expected and the euro came under pressure.
The U.S. Department of Energy said on Wednesday that U.S. crude stockpiles rose sharply last week.
(Additional reporting by Gene Ramos and Robert Gibbons in New York, David Sheppard in London and Alejandro Barbajosa in Singapore; Editing by Marguerita Choy)