Oil fell below $66 a barrel on Monday, extending last week's 8.4 percent drop, as investors focused on high inventories and sluggish demand, shrugging off tension between Iran and the West.

Gains in the U.S. dollar also put pressure on oil, which had risen earlier in the session on the back of Iran's test firing of missiles. Stock markets fell in Asia and eased in Europe.

U.S. crude fell 43 cents to $65.59 a barrel by 0954 GMT (5:54 a.m. EDT), after rising by as much as 64 cents. The contract settled up 13 cents at $66.02 on Friday. London Brent fell 44 cents to $64.67.

The market is down on currency, and general economic malaise which carried the market so much lower last week, said Christopher Bellew, a broker at Bache Commodities in London.

The Iranian situation is not having much influence. If it was, we'd be back toward $70 again.

Iran test-fired a type of missile on Monday which defense analysts have said could hit Israel and U.S. bases in the Gulf region, state television reported.

The drills coincide with increased tension in Iran's nuclear dispute with the West, after last week's disclosure by Tehran that it is building a second uranium enrichment plant.

Tensions over Tehran's nuclear programme have supported oil prices in recent years. The country is the second-largest oil producer in the Middle East and a major crude oil exporter.

In late 2008, Iran threatened to block the Strait of Hormuz, through which about 40 percent of the world's globally traded oil passes, when tensions rose in another row with the United States around the nuclear work.

Even so, sluggish oil demand, reinforced by some lackluster economic data from the United States last week, continued to command investors' attention.

Oil prices posted their largest weekly decline in around 2-3 months last week, pressured by government data showing U.S. crude oil inventories had risen, suggesting demand remains weak.

U.S. durable goods orders dropped by the largest amount in seven months while a rise in new home sales was less than forecast, according to data from the U.S. Commerce Department on Friday. (Additional reporting by Fayen Wong in Perth; Editing by Keiron Henderson)