Brent crude futures fell on Tuesday, after rising nearly $2 a the previous day, as worries about global economic growth and a stronger dollar reduced appetite for risky assets.
The focus was on the euro zone crisis ahead of a meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel.
September Brent crude futures were $1.06 lower at $108.85 a barrel, having plumbed earlier lows of $108.39. US crude fell by $1.30 cents to $86.58.
"All eyes are on this European meeting today, so it's going to be rather choppy and volatile ahead of that," GFT Global market strategist David Morrison said. "[Oil is] reacting to the weakness in the euro, the strength in the dollar, and there is a general risk-off mode ... traders taking money off the table."
Manufacturing in the New York area contracted for a third straight month in August, data showed on Monday, dashing any lingering hopes for a rebound in the second half of the year.
The survey is one of the earliest regional guideposts to US factory conditions, and analysts said it boded poorly for the larger national survey due at the beginning of September.
"In the current economic climate we see therefore little sustainable upside in buying Brent above $110 a barrel," Petromatrix's Olivier Jakob said in a note.
Worries about the faltering economic recovery also gained prominence after data from European powerhouse Germany showed its gross domestic product growth slowed more than expected in the second quarter.
"The overall feeling looking at the Germany data is that the outlook for global growth doesn't look particularly good, in which case the upside to oil is capped into the medium term," Morrison added.
Oil prices were also pushed lower by a stronger dollar, which makes commodities priced in the greenback more expensive for holders of other currencies.
The dollar was up 0.40% against a basket of currencies by 1138 GMT. The greenback had fallen to a near three-week low against the euro on Monday.
VTB Capital analyst Andrey Kryuchenkov said Brent prices continued to trade in parallel with the UK blue chip index performance.
"Brent's monthly rolling correlation to the FTSE 100 index remained at a more than a one-year high, near 95%, with intraday direction still dictated mostly by the equity markets at the moment", he wrote in a note.
The market will be watching for a slew of US economic reports that come out this week, including housing starts and industrial production data later on Tuesday, for clues on the health of the world's biggest economy.
Concerns over the US recovery and the ongoing euro zone crisis have dragged down oil prices this month. Brent surged on Monday as hopes for a resolution to Europe's issues rose ahead of the Tuesday meeting between French and German politicians.
While the risk of a new US recession has risen over the past couple of months, an outright contraction will most likely be avoided, Atlanta Federal Reserve Bank President Dennis Lockhart said on Monday.
The World Bank called for national governments to seek long-term debt curbs to solve the current sovereign debt crises in Europe and the United States but said it was too early for special action by the Group of 20 nations.
