Brent crude oil fell more than 1 percent to below $109 a barrel on Wednesday as the euro zone crisis deepened with violent clashes and a general strike in Greece and more bad economic news for Spain.
Greek police fired teargas at youths hurling petrol bombs and stones as tens of thousands took to the streets in Greece's biggest anti-austerity demonstration in months.
The strike followed violent protests in Spain and reignited worries that the euro zone debt crisis was deepening despite efforts by central banks to reflate economies.
The news from Europe outweighed a potentially positive boost from government data showing a draw of 2.45 million barrels in U.S. crude stocks, defying a forecast of a small rise in inventories in a Reuters poll.
The southern European turmoil hit the euro and boosted the dollar, a trend that was accelerated after the Bank of Spain said the country's gross domestic product fell at a "significant rate" in the third quarter.
North Sea Brent crude oil futures fell $1.90 to a low of $108.55 before recovering a little to trade around $108.70 by 1440 GMT.
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U.S. light crude oil futures fell even more sharply, dropping to an intra-day low of $89.08, down $2.29.
The falls wiped out gains made earlier this month when both contracts reached four-month highs on a commodity-wide rally fed by stimulus measures by U.S. and EU central banks.
"It is 'Risk Off' today," said Olivier Jakob, energy analyst at Petromatrix in Zug, Switzerland. "The Greek strike and Spanish demonstrations are getting a lot of coverage."
Commerzbank oil analyst Carsten Fritsch in Frankfurt agreed, saying investors were losing faith in the ability of the European Central Bank to hold the euro zone together.
"No solution is in sight for the euro zone crisis," Fritsch said. "It is impossible to make financial reforms in the face of such strong opposition from the people."
The euro fell to a two-week low against the dollar. Oil tends to move inversely to the dollar as many commodities are priced in the U.S. currency.
Stock markets and other commodities also fell with investors expressing increasing concern over the euro crisis, the pace of global economic growth and its effect on demand.
"WE ARE BLEEDING"
The clashes in Greece occurred after more than 50,000 people marched to parliament chanting "We won't submit to the troika (of lenders)" and "EU, IMF Out" on a day of strikes against a new round of cuts demanded by EU and IMF lenders.
Police said the demonstration was the largest since a May 2011 protest, and among the biggest since Greece first resorted to aid from international lenders in 2010.
"We can't take it anymore - we are bleeding. We can't raise our children like this," said Dina Kokou, a teacher and mother of four who lives on 1,000 euros a month. "These tax hikes and wage cuts are killing us."
Investors also remain preoccupied with slow demand in China, the world's second-biggest oil consumer, as smaller firms, the key driver of economic growth and job creation, are starved for cash as banks still favour large, state-backed companies.
Oil investors set aside tension between Iran and the West and worries over possible risks to Middle East supply if hostilities break out in the region.
U.S. President Barack Obama on Tuesday told the UN General Assembly the country would do what it must to prevent Iran from obtaining a nuclear weapon - the latest in a series of exchanges over Iran's disputed nuclear programme.
The United States and Europe have imposed sanctions on Iran's oil shipments to register their opposition to its nuclear research, which the Middle Eastern nation insists is for peaceful purposes.
Iranian President Mahmoud Ahmadinejad this week stepped up rhetoric against Israel, which has hinted it could strike Iran's nuclear sites. Iran Press TV this week said the Islamic Republic successfully tested an anti-aircraft system.