Brent crude fell below $112 per barrel on Monday, reflecting investor concerns that a shaky global economy may hurt oil demand following fresh signs of weakness in China and Japan and evidence of a new recession in the debt-saddled euro zone.
The drop comes after the crude benchmark closed out the third quarter with its biggest three-month gain in 1-1/2 years, buoyed by supply risks in the Middle East and efforts among global central banks to stimulate flagging economies.
But manufacturing data out of China that offered more evidence of a seventh straight quarter of slowing economic growth in the world's No. 2 oil user put demand prospects back in doubt. A survey in Japan also pointed to a worsening mood among businessmen, adding to the sour tone.
And in the euro zone manufacturing suffered the worst quarter for three years in the three months to September, pointing to a new recession.
"A visitor from another planet could be forgiven for thinking that the world is a happy place based on the financial results of the third quarter," said Tamas Varga from PVM brokerage.
"There's been a dramatic recovery from the pessimism in May - not particularly understandable when the euro zone's problems are far from over... Currently hopes rather than facts are what the bulls have hung their hats on," he added.
Front month Brent futures traded 55 cents down to $111.85 per barrel by 1018 GMT, while U.S. crude futures dropped 39 cents to $91.80.
Brent gained 14.9 percent in the third quarter, following a steep drop of 20 percent in the second quarter, while U.S. crude rose 8.5 percent in the quarter after slumping 17.5 percent in April-June.
After a choppy September, helped largely by a series of stimulus announcements by central banks in the United States and Japan as well as a bond-buying plan by the European Central Bank, investors have begun to worry that the measures may increase liquidity in markets but not spur real demand.
An official survey of factory managers in China remained in contraction territory for a second successive month in September despite improving slightly from a nine-month low in August, as the world's second-biggest economy struggles against cooling exports, factory output and fixed asset investment.
"The overall implication of the China PMI is moderately negative, suggesting Chinese manufacturers are still cutting production and reducing inventories, in light of the weak demand (especially domestic demand)," Citigroup said in a note.
Uncertainty about Spain's bailout also weakened sentiment across commodities, equities and the euro.
Banks in Spain, which has replaced Greece, Ireland and Portugal as the main threat to the single currency, will require about 59.3 billion euros ($76.29 billion) of extra capital to beef up their strength.
The ECB will hold a policymakers meeting on Thursday and traders will be closely watching ECB chief Mario Draghi's comments.
"Eurozone uncertainty, however, remains front and centre," said Jason Schenker, President of Prestige Economics in Texas.
Despite the wobbly economic picture, Middle East supply risks should help limit losses in oil as continued sabre-rattling by Iran and Israel keep investors on the edge.
Israeli Prime Minister Benjamin Netanyahu at last week's U.N. general assembly in New York, hinted that his country may take military action against Iran, a day after Iran's President Mahmoud Ahmadinejad said that Israel would be "eliminated."
"On the supply side, we find plenty of support for oil prices due to a series of outages stretching from the North Sea, Yemen, Syria, China to Brazil," said analysts from Merrill Lynch, who expect Brent to hit $120 per barrel before year-end.
A Reuters survey showed on Friday that output from the Organization of the Petroleum Exporting Countries fell in September to the lowest since January, led by a drop in exports from Angola, Nigeria and in supply from Iran. (Editing by Manolo Serapio Jr. and Keiron Henderson)