Brent crude oil fell towards $96 a barrel on Monday after weak data from Europe and Asian economies including China, the world's top energy consumer, deepened concerns that the world economy is deteriorating.
Worries over the euro zone crisis also pressured oil as enthusiasm faded over an EU bank bailout deal, which on Friday had helped crude to its fourth-biggest daily gain on record.
Finland and the Netherlands added to fears over the fragile nature of the agreement by saying they would block a key element of a deal that would have allowed the euro zone's new permanent bailout fund to buy bonds in the market.
The impact of an EU embargo on Iranian oil shipments, which took effect on Sunday, was overshadowed by the grim global macroeconomic picture, analysts said.
Brent crude fell $2.50 to a low of $95.30 a barrel before recovering to around $96.60 by 1310 GMT. U.S. crude shed $1.80 to a low of $83.16 but then climbed back to around $83.80.
On Friday, Brent crude rose more than $6 a barrel while U.S. crude jumped by more than $7, their fourth-largest daily gains in dollar terms since the contracts were launched.
"Oil is being driven by psychological factors," said Eugen Weinberg, global head of commodities research at Commerzbank in Frankfurt. "Today's sell-off is a natural reaction after such enormous gains at the end of last week."
Friday's gains reflected optimism an agreement to strengthen European banks and cut borrowing costs for Italy and Spain would reduce the risk of a euro zone break-up.
But that positive sentiment was tempered by data on Monday showing factory activity slowing in many key economies.
Euro zone manufacturing took another downturn in June and factories are preparing for worse, according to business surveys showing jobs cut at the fastest in two-and-a-half years. The survey showed factories in Germany and France are succumbing to a downturn that started in southern Europe.
Manufacturing in China, the world's second-biggest economy, also worsened in June with export orders, usually an indicator of global economic health and trade flows, posting their biggest fall since December.
China is the world's second-largest oil consumer and any sharp slowdown there could have a significant impact on global oil demand growth.
A firm dollar and weaker euro also weighed on commodities priced in the U.S. currency.
But oil found some support from a strike by Norwegian offshore oil workers, which entered its second week on Sunday.
A well-placed trading source said the strike had begun to slow crude loadings in the North Sea and had delayed a cargo of Norwegian Oseberg, part of the North Sea Dated Brent benchmark and the basis of many over-the-counter trades.
Labour unions say they are bracing for a long conflict and possible escalation to further lower output from the eighth-largest oil exporter.
This coincides with the EU ban on Iranian crude imports aimed at choking Iran's export earnings to try to force it to curb a nuclear programme they fear includes weapons development. Tehran says it has no such plan.
Iran dismissed the embargo saying it was fully prepared to counter the impact of sanctions with a $150 billion war chest of foreign reserves.
Iranian oil exports slipped by 180,000 barrels per day (bpd)to 2.95 million bpd in June, according to a Reuters survey of sources at oil companies, OPEC officials and analysts. That would be its lowest output since it produced 2.81 million bpd in 1989, according to figures from the U.S. Energy Information Administration. (Editing by William Hardy)