Oil dropped 3 percent on Monday, crashing through technical support levels as the reduction of the United States's top-tier credit rating by Standard & Poor's hammered markets and stoked concerns of an economic slowdown.

Brent crude broke through the 200-day moving average after shedding nearly $10 dollars so far in August, as the downgrade sent world stocks to the lowest level in nearly a year. <.N>

The move by S&P added to concerns about demand in the world's top oil consumer, which has seen gasoline use fall against year-ago levels in the midst of the summer driving season when demand usually peaks.

In the tumultuous aftermath of the U.S. downgrade from S&P, the world also is downgrading the oil market, said Phil Flynn, analyst at PFGBest Research in Chicago.

Brent crude fell $3.20 to $106.17 a barrel by 11:38 a.m. EDT, after earlier falling as low as $105.43 a barrel. Brent broke through the 200-day moving average of $106.89 a barrel, after pushing through the key technical level during intraday activity on Friday before settling higher.

U.S. crude fell $3.25 to $83.63 after sliding to its lowest intraday level since November at $82.52 a barrel in early trade.

U.S. oil dropped further below 30 on the 14-day relative strength index, which is often interpreted as a sign a commodity has been oversold, while Brent crude again tested the 30 level.

While analysts warned oil prices could fall further still if a second recession takes hold, both Merrill Lynch and Goldman Sachs maintained their 2012 price forecasts.

We believe that WTI crude oil prices could briefly drop to $50 under a recession scenario, Merrill Lynch said in a note, but it maintained its 2012 average forecast for U.S. crude at $102 a barrel and its forecast for Brent next year at $114.

(Reporting by Matthew Robinson, Edward McAllister, Robert Gibbons and Gene Ramos in New York; Christopher Johnson in London and Manash Goswami in Singapore; editing by Marguerita Choy)