Oil prices sank 4 percent on Tuesday as dealers rushed to take profits from a rally that had culminated in a 10-month peak earlier in the day.

U.S. crude oil dropped $3 to $71.37 a barrel, down from a peak of $75, in the biggest percentage loss since August 14. Brent crude dropped $2.87 to $71.39 a barrel.

It looks like crude tested the $75 level and failed, said Tom Bentz, a trader with BNP Paribas.

Players said oil's more than 65 percent rally this year was being viewed as a good opportunity to lock in profits.

There's been profit-taking in the energy markets ... there's a feeling that the markets are heavy and are sinking, with crude overvalued by around $20 a barrel, said Tim Evans, analyst at Citi Futures Perspective in New York.

Oil prices had shot up in early trading after U.S. reports showed increased consumer confidence and home prices in the world's largest energy consumer -- adding to a string of encouraging economic indicators.

Wall Street stock indexes climbed to their highest levels since October's plunge <.N> on the back of the data, getting further support from news U.S. President Barack Obama renominated Ben Bernanke as chairman of the Federal Reserve.

Oil prices, which usually track equities markets closely, could hold around current levels next year, according to a Reuters survey of more than 30 analysts.

The analysts raised their consensus forecast for the fifth straight month on expectations higher fuel demand in an economic recovery would support prices.

The oil market's focus will shift later to weekly U.S. oil inventory data.

Analysts in a Reuters survey forecast a drop in U.S. crude and gasoline inventories. Middle distillate stocks, including heating oil, were seen increasing.

Last week, U.S. crude stocks posted a big fall as refiners boosted operations and imports dropped sharply to hit their lowest level in 11 months, U.S. Energy Information Administration data showed.

Data from the American Petroleum Institute will be released at 4:30 p.m. EDT on Tuesday, and the equivalent U.S. government data is due out on Wednesday.

(Additional reporting by Ramthan Hussain in Singapore and Ikuko Kurahone on London; Editing by Lisa Shumaker)