New York's main contract, light sweet crude for September delivery, dropped 48 cents to US112.39 (S$158.90) a barrel.

That came on top of a 90-cent drop in New York trade Monday, when the price closed at US$112.87 at the end of floor trading.

Brent North Sea crude for October delivery fell 58 cents to US$111.36 after settling 61 cents lower at US$111.94 a barrel on Monday in London.

'There's a fear in the oil market right now about some of the pretty dramatic news we've seen coming out of the United States spreading into Europe and Japan,' said Mr Dave Ernsberger, Asia director of global energy information provider Platts, in Singapore.

Oil demand in the United States has suffered its biggest fall since 1982, Mr Ernsberger said, describing demand in the world's largest oil consumer as 'a basket case.' Demand has suffered while the US economy struggles.

World oil prices have fallen heavily from record highs above US$147 in early July but are still well above levels of a year ago. Oil broke through US$100 for the first time at the start of this year.

'Oil, if you think about it, has got plenty of room to fall,' Mr Ernsberger said.

Japan's central bank began a two-day meeting on Monday at which it was expected to hold interest rates steady in the face of a shrinking economy and the fastest inflation in a decade.

The risk of Japan's first recession in six years appears to be the Bank of Japan's biggest concern after Asia's largest economy contracted by 0.6 per cent in the second quarter of 2008, analysts said.

In Europe, official figures showed the 15-nation eurozone economy contracted for the first time, shrinking by 0.2 per cent in the second quarter. -- AFP