Oil prices fell on Friday as the deteriorating global economic outlook continued to weigh on the market.

U.S. crude futures for March delivery, which expired on Friday, settled at $38.94 a barrel, down 54 cents, after posting the biggest settlement gain since December 31 in the previous session.

April Brent crude settled at $41.89 a barrel, down 10 cents.

Right now, oil is being driven by the overall fears for the economy and how that is going to weigh on demand going forward, said Gene McGillian, energy analyst for Tradition Energy in Stamford, Connecticut.

Earlier in the day, crude prices had dropped below $38, but trimmed losses after the White House said it strongly believed in a privately held banking system, soothing market fears about the possibility of U.S. bank nationalizations.

The late rebound in the stock market may signal that crude futures may be able to resume its upward thrust that we saw yesterday, said Phil Flynn, analyst at Alaron Trading in Chicago. But it depends on whether the stock market regains its composure here.

The U.S. stock market cut early sharp losses in afternoon activity after the White House comments reassured investors.

Oil prices rallied strongly on Thursday, jumping 14 percent, after data showing an unexpected drop in U.S. crude stocks. But worries over the health of oil demand have resurfaced.

Crude inventories in the United States, the world's top consumer, fell slightly last week on lower imports and higher demand, the U.S. Energy Information Administration said, ending seven straight weeks of builds against market expectations.

Crude prices have fallen more than $100 a barrel from the peaks hit last July as the worsening economic crisis has bitten into oil demand, prompting the Organization of the Petroleum Exporting Countries to agree to deep output cuts.

In the latest indication that OPEC members are complying with the agreed cuts, Kuwait notified at least two buyers in Asia that it will keep curbs of 5 percent below contracted volumes for April-June term crude oil supplies, steady from March, trade sources said.

(Additional reporting by Gene Ramos and Matthew Robinson in New York, Christopher Johnson in London and Chua Baizhen in Singapore; Editing by Walter Bagley)