Oil fell more than $3 to $105 a barrel today, wiping out the previous session's gains, after talks between US lawmakers over a bailout package to mop up toxic debt stalled.
Traders said oil's gains yesterday were largely driven by news that lawmakers appeared close to a final deal on the massive bailout plan, which could help the world's largest energy-consuming nation avoid a deep recession that would cut deeply into fuel demand.
But the deal to rescue the faltering US financial system hit a wall yesterday amid bickering between Democrats and Republicans.
US crude for November delivery fell $2.70, or 2.5 percent, to $105.32 a barrel by 0823 GMT, after hitting a low of $105.00. It had settled at $108.02 yesterday. London Brent crude fell $2.42 to $102.18.
Oil has gained about 11 percent so far this year on geopolitical tensions between Iran and the West, supply disruptions in Nigeria and a falling US dollar, but it is still 28 per cent below the record price of above $147 hit in mid-July.
"The general direction of the market is heading downwards because the economic sentiment and economic outlook are weak," said John Vautrain, an energy analyst at Purvin & Gertz in Singapore. "It is a very volatile time and the market will get more and more jittery each day the US rescue plan gets delayed."
Oil's decline on Friday also came despite a weaker US dollar, which was also hit by doubts of an imminent agreement to resolve the banking crisis in the United States.
Concerns about the weakening US economy and increasing evidence of slowing fuel demand have pushed crude prices down from their record highs.
A rescue for the US financial system appeared in chaos on Thursday amid accusations Republican presidential candidate John McCain had scuppered the deal.
News that Washington Mutual was closed by US authorities and its assets sold in America's biggest-ever bank failure also rattled financial markets.