Oil prices slumped $4 on Wednesday as Saudi efforts to tame prices and a massive rise in U.S. crude inventories after Storm Isaac fuelled a third day of heavy fund liquidation, one of the biggest sell-offs in more than a year.

European benchmark Brent crude crashed below the 50- and 200-day moving-average, sparking technical selling that pushed it to the lowest in six weeks. Big hedge funds were seen liquidiating bullish positions built ahead of the Federal Reserves' third dose of stimulus, announced last week.

The rout began late on Monday with an abrupt flash crash triggered by a large sell order from a macro-fund, traders say. Prices declined further on Tuesday and Wednesday, taking this week's slide to more than 7 percent after Saudi Arabia said it would act to move prices down from a four-month high.

"People are thinking that maybe the Saudis are going to produce more, and some funds are taking the opportunity to liquidate positions," said Christopher Bellew at Jefferies Bache.

Prices fell further after U.S. data showed weekly oil stockpiles jumped 8.5 million barrels, far more than expected.

Brent November crude fell $3.84, or 3.4 percent, to settle at $108.19 a barrel, having recovered from a session trough of $107.40, the lowest since Aug. 3.

Brent's three-day drop stood at more than 7 percent, the biggest since a 7.73 percent dive in early June. That, in turn, was the biggest three-day slide since August, 2011.

U.S. October crude, which expires on Thursday, fell $3.31, or 3.47 percent, to settle at $91.98 a barrel after dropping below the 50-day moving average of $93.08. U.S. November crude fell $3.32, to $92.30 a barrel.

AFTER SPR, MARKET EYES SAUDIS

Oil traders had worried for weeks about the possibility that the U.S. government could tap strategic oil reserves to control prices from levels that could stall economic growth.

Oil came under more pressure on Tuesday when a senior Gulf source said Saudi Arabia, the biggest exporter, is working to lower oil prices, producing around 10 million barrels per day.

Ali al-Naimi, Saudi Arabia's oil minister, had said on Sept. 10 that OPEC's top exporter was worried about high oil price and would take steps to moderate them.

"The straw that broke the camel's back here is the Saudi news yesterday," said Freepoint Commodities analyst Brison Bickerton. "Any time the market's had a long run with traders building bullish positions over a number of weeks you're more likely to get a reversal."

In the past 10 weeks, big speculators and hedge funds added nearly 100,000 net long positions -- equivalent to 100 million barrels -- in U.S. WTI futures contracts. It was one of the biggest and fastest such build-ups since 2010, data show.

Crude prices got a brief boost early when Japan followed the U.S. Federal Reserve's stimulus with its own decision to ease monetary policy by boosting asset purchases in the face of a slowing global economy.

But oil industry sources said concerns about debt-laden Spain's finances and the possibility of Spain requesting a bailout pulled oil back. (Additional reporting by Simon Falush in London and Luke Pachymuthu in Singapore; Editing by Marguerita Choy, David Gregorio and Bob Burgdorfer)