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Oil slides $4 on economic gloom, dollar

By Jessica Donati

LONDON (Reuters) - Oil prices fell by more than $4 a barrel on Thursday, with U.S. futures touching $81.86 barrel as a combination of signals heightened worries about global economic growth and a rallying U.S. dollar added to downward momentum.

Investors were rattled by the U.S. Federal Reserve's statement that the world's largest oil consumer faced significant downside risks, and analysts worried measures to kick-start growth would be insufficient.

Adding to gloom, a slowdown in China and the worst euro zone private sector growth in over two years cast clouds over the outlook for the global economy.

"It's a combination of no QE3, low economic growth, China's PMI falling and European PMI data either slightly or widely below expectations," said Thorbjørn Bak Jensen, an analyst at A/S Global Risk Management Ltd.

U.S. crude futures were down $3.93 at $81.99 a barrel at 1208 GMT (8:08 a.m. ET), while Brent futures were $3.81 lower at $106.55 a barrel.

Further downward pressure on Thursday was exerted by the U.S. dollar, which hit a seven-month high against a basket of currencies <.DXY> as investors fled from risky assets.

"Treasuries have rocketed up since the U.S. traders have come in and that's taking Bunds with it... this is a serious risk-off trade today, wherever you look," a trader said.

CLOUDS GATHER

The euro zone's private sector contracted this month for the first time in two years, underscored by German business activity figures dropping to a 26-month low.

With signs the crisis in Greece and other Mediterranean countries was spreading to others in Europe, and a far-from-reassuring prognosis issued by the Fed, fears were magnified by Chinese manufacturing sector data.

A survey showed factory activity in the world's number two economy contracted for a third month, indicating China may fail to provide a counterweight to flagging U.S. and European growth.

The disappointing round of economic data helped send world stocks to a fresh one-year low and investors poured money into safer currencies.

"It is hard to ignore the macroeconomic picture. Oil seems to have fallen in line with equity markets," said Tony Nunan, a risk manager with Tokyo-based Mitsubishi Corp.

"Otherwise, the data on crude stocks was fairly bullish for oil. Prices shouldn't have fallen so low, based on just oil fundamentals."

The round-up of disappointing surveys combined with the Fed's statement accompanying "Operation Twist" wiped out bullish sentiment the previous day when weekly U.S. Energy Information Administration data showed crude inventories fell to the lowest level since January.

The next major economic event markets will be watching is a G20 meeting on Thursday and Friday that is expected to focus on Europe's response to its debt crisis.

(Additional reporting by Manash Goswami; editing by James Jukwey)

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