NEW YORK - OIL prices fell on Friday amid uncertainty over the fate of a proposed US government bank bailout mired in wrangling between the White House and Congress.

New York's main contract, light sweet crude for November delivery, fell US$1.13 (S$1.61) a barrel to close at US$106.89.

In London, Brent North Sea crude for November shed US$1.06 to settle at US$103.54.

President George W. Bush's administration and lawmakers struggled on Friday to hammer out a compromise over a US700-billion-dollar plan to buy tainted mortgage-related assets from financial firms.

A deal that appeared on the verge of happening had lifted oil prices by more than two US dollars on Thursday, but uncertainty returned after the market closed when the would-be deal disintegrated in the face of a revolt from Mr Bush's own party in Congress.

'Prices were knocked lower when a tentative plan to thaw out the nation's credit markets fell apart,' said Mike Fitzpatrick, analyst at MF Global.

Mr Bush, Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke argue that the massive package is urgently needed to avert a wider collapse of the economy.

'The rhetoric from the president, the Treasury secretary and the Fed chairman is far from calming,' said Sherry Cooper of BMO Capital Markets.

'Warnings of financial Armageddon could, in itself, trigger panic,' she added.

Phil Flynn at Alaron Trading said the macroeconomics of the situation 'is playing right into the bear oil trader's hands.'

'It is obvious that the demand growth for oil is going to be severely challenged. With the world's largest consumer of almost everything ... about to have a financial meltdown, the prospects for demand growth are not that good,' Mr Flynn said.

'Participants are waiting and watching to see what colour smoke appears from Washington,' he added.

Analysts at Briefing.com said there was a 'growing consensus' that a federal asset funding plan would be approved.

'Still, there is little clarity when political infighting will cease and a plan will be announced,' they wrote in a client note.

Oil prices have dropped sharply from record-high levels above US$147 in July on worries that demand will shrink in the faltering global economy. -- AFP