Oil futures dropped 3.8% Wednesday as optimism faded that European leaders were making headway in resolving the euro-zone debt crisis.

Light, sweet crude for November delivery settled $3.24, or 3.8%, lower to $81.21 a barrel on the New York Mercantile Exchange. Brent crude on the ICE Futures Europe exchange settled down $3.33, or 3.1%, to $103.81 a barrel. The losses also tracked a steep decline in U.S. equities.

Oil prices were undermined by waning hopes for a solution to the European credit crunch. Reports emerged that German Chancellor Angela Merkel was facing an uphill battle to muster the votes needed to expand the euro-zone bailout fund. Anticipation that a resolution could be worked out had sent oil markets up 5.2% Tuesday.

"Right now it's kind of all about Europe. The markets are hanging on every word that comes out of Angela Merkel's mouth," said Matt Zeman, a market strategist at commodity broker Kingsview Financial.

"Right now I think all these markets are just sentiment driven," Zeman added, "and today we're starting to see sentiment falling again as we're not seeing any follow through" on a euro-zone deal.

Meanwhile, investors hoping for higher prices got no help from the weekly petroleum inventory report from the Energy Information Administration. The weekly data saw a larger-than-expected increase in inventories.

The report showed crude stocks rose by 1.9 million barrels, while a survey of 15 analyst forecasts by Dow Jones Newswires expected them to rise by 700,000 barrels. The API report also found gasoline stocks rose by 791,000 barrels, compared to the expected rise of 900,000 barrels, and that distillate stocks rose by 72,000 barrels, compared with an expected rise of 100,000 barrels. Refinery utilization declined by 0.5 percentage point, to 87.8% of capacity, compared with an expected decrease of 0.7 percentage point to 87.6% of capacity.

Also depressing prices was ConocoPhillips' announcement that it also may close its 185,000 barrel-a-day refinery in Trainer, Pa., if it can't find a buyer for the facility in the next six months. Such a move could shift more supply back onto the market.

Given the euro-zone pessimism, the bearish inventory report and the possible refinery closing, "I think that sort of throws a wet blanket on the optimism," said Andy Lipow, the president of consulting firm Lipow Oil Associates.

Front-month October reformulated gasoline blendstock, or RBOB, was down 3.90 cents, or 1.45%, to $2.6365 a gallon. October heating oil fell 4.98 cents, or 1.73%, to $2.8268 a gallon.