Oil prices slipped on Tuesday in volatile trade reacting to the dollar's seesaw trajectory and as an interest rate increase by India weighed on expectations for oil demand growth.

There are concerns that higher interest rates could be a growth killer and that could be what is weighing down oil prices. India is one of the biggest emerging economies where a lot of global growth will come from, said Michael Hewson, an analyst at CMC Markets.

India's central bank raised interest rates more than expected and vowed to battle price pressures even at the cost of some economic growth, a fight that could threaten fuel demand in a crucial region for rising oil use.

The strength of the dollar index <.DXY>, which tracks the greenback against a basket of currencies, weighed on oil as the dollar attempted to recover from a three-year low.

The dollar index seesawed intraday as the Swiss franc hit a record against the greenback and the euro extended gains, with investors continuing to expect the U.S. central bank to lag on interest rate increases despite recent rate hikes in Europe.

The dollar index appears to be trying to find a shelf in the area of 73.00 and if it does that could spark a correction, said Andrew Lebow, broker at MF Global in New York.

Brent crude for June fell $1.63 to $123.49 a barrel by 1:30 p.m. EDT (1730 GMT), after sliding to $122.88. Brent's 2011 peak of $127.02 was reached on April 11.

U.S. crude for June fell $1.22 to $112.30, having slipped as low as $111.72 but remaining inside Monday's trading range, as had Brent.

Before settling lower, U.S. crude's $114.83 peak on Monday was the highest price since it hit $130 on September 22, 2008.

Brent crude trading volumes rebounded after being dampened by a holiday in Britain. U.S. trading volumes were on pace to trade about half million lots, near the 30-day average.

China's state oil giants PetroChina <0857.HK> and Sinopec <0386.HK> have asked the government to cut a fuel consumption tax to reduce their refining losses.

China's government has recently taken action, including raising interest rates and bank reserve requirements, attempting to slow inflation and cool its economy.

RISING U.S. INVENTORIES

U.S. crude oil inventories rose last week, with imports outpacing refinery demand, according to Monday's Reuters survey of analysts ahead of weekly industry and government reports.

Distillate and even gasoline stocks also were estimated to be up and investors will have a laser focus, as Lebow put it, on gasoline demand to see if usually inelastic U.S. gasoline use shows signs of slowing because of high retail pump prices.

Gasoline prices hit $3.96 a gallon, up 8.4 cents in the latest week, according to the Energy Department.

The industry group American Petroleum Institute's report is due at 4:30 p.m. EDT (2030 GMT) on Tuesday, with the U.S. Energy Information Administration's report following on Wednesday.

GEOPOLITICAL RISKS

Before paring losses on Monday, Brent and U.S. crude oil prices initially fell several dollars on Monday after news hit that the U.S. military had killed Osama bin Laden, mastermind of the September 11 attacks.

The potential for retaliatory attacks after bin Laden's death and continued conflict in Libya and turmoil in the Middle East remain potent geopolitical risks and supportive to oil prices, according to brokers and analysts.

OPEC EXPORTS

Expectations that OPEC production fell in April, in addition to the dollar's volatility, helped limit oil's losses, investors said.

(Additional reporting by Gene Ramos in New York, Alex Lawler and Claire Milhench in London and Francis Kan in Singapore;editing by Sofina Mirza-Reid)