Oil fell more than $1 per barrel toward $77 on Tuesday as the dollar rose against a basket of currencies and as stock markets slipped in Europe and Asia.
The dollar index rose 0.5 percent as the euro hit a four-week low. Oil often weakens when the dollar rises, partly because crude is priced on international markets in the U.S. currency.
European shares fell more than 2 percent to a one-month low on Tuesday, struggling as news of a shake-up in the British banking sector made investors wary of risky assets.
U.S. crude for December tumbled $1.10 per barrel to a low of $77.03 after hitting an early high of $78.46 and settling up $1.13 on Monday. By 1100 GMT (6:00 a.m. EST), the December contract stood at $77.34, down 79 cents.
London Brent crude futures eased 71 cents to $75.84 a barrel.
The strength of the dollar is probably the most important factor driving commodities in general and oil in particular, said Commerzbank commodities analyst Eugen Weinberg.
Equity markets are down in Asia and Europe and there is a feeling that recent price increases may have been overdone, that despite the economic recovery, the current oil supply and demand situation probably does not justify the recent rise in prices.
U.S. crude futures rose to their highest level this year at $82 per barrel on October 21, after turning positive on a rolling 12-month basis in the middle of last month for the first time since October 2008, raising the risk of commodity-led inflation.
Traders were awaiting news of oil inventories in the United States, the world's largest energy consumer.
Industry group American Petroleum Institute will issue its weekly report on U.S. inventories at 2130 GMT, while the U.S. government Energy Information Administration will issue its data on Wednesday.
A Reuters poll of analysts forecast weekly U.S. inventory data for the week to October 30 would show a 1.5 million-barrel build in crude stockpiles, a 500,000-barrel draw in distillates and a 300,000-barrel rise in gasoline inventories.
Oil got a boost on Monday after U.S. manufacturing activity hit its highest level in 3-1/2 years last month and pending home sales contracts unexpectedly jumped in September, easing fears the budding economic recovery of the world's largest oil consumer would falter.
A separate report from the U.S. Commerce Department showed spending on construction projects rose in September.
Energy traders have closely watched economic data and equities markets this year for signs of a turnaround in the economic crisis that could bolster flagging oil demand.
The U.S. Federal Reserve starts its two-day meeting later on Tuesday and while it is expected to keep rates unchanged, there is speculation that it might drop or alter its pledge to keep rates low for an extended period.
(Editing by James Jukwey)