Oil fell toward $38 on Tuesday as global markets tumbled, dragged down by Monday's fall in U.S. stocks to a 12-year low.

Economic worries grew after Wall Street sank on Monday as news the U.S. government was set to raise its stake in Citigroup failed to offset fears that a number of embattled U.S. banks could be nationalized.

European stocks fell on Tuesday and Asian shares hit a three-month low, with Japan's Nikkei index flirting with a 26 year low.

U.S. crude oil futures fell to as low as $37.65 and were trading 21 cents lower at $38.23 a barrel by 0930 GMT (4:30 a.m. EST). London Brent crude was 1 cent up at $41.00.

U.S. crude fell $1.59 on Monday even though OPEC producers were likely to pump less oil in February than January, enforcing agreements to curve supplies.

Many market participants expect OPEC, the source of more than a third of global oil supply, will decide on another supply cut at a meeting in March as demand falls. Oil prices are down by $110 from their peaks in July.

Chances are high that OPEC will move again to put through more cuts when it next meets on March 15, MF Global said in its research note.

For the short term however, the weakness in the US stock market is the 'big elephant in the room' and should continue to weigh on commodity sentiment.

Some OPEC members have already suggested the producer group would decide to cut supply again.

Oil traders are eyeing U.S. oil inventory data on Wednesday, which is likely to show a 1.9 million barrel increase in crude stocks last week, a preliminary Reuters poll showed.

Later on Tuesday, global markets will closely watch Federal Chairman Ben Bernanke's policy report to U.S. Congress on new bank rescue programs and President Barack Obama's 2010 fiscal year budget proposal to a joint session of Congress.

The global financial crisis is still at hand, making oil prices drift lower along with other commodities, Victor Say, an analyst at Informa Global Markets, said.

The economic data is not at all rosy, and if nothing comes out of the U.S. on plans to rescue the banks in the next couple of days, oil prices will go down, probably even below $36.

(Reporting by Angela Moon in Seoul and Ikuko Kao in London; editing by Sue Thomas)