New York oil plunged under $89 per barrel on Wednesday, nearing a two-month low on demand concerns arising from the eurozone debt crisis which is still plaguing Greece and Spain, dealers said.
The market also dived as fresh data sparked fresh concern over the health of the United States economy, which is the world's biggest crude consumer.
New York's main contract, light sweet crude for November, dived to $88.95 per barrel -- the lowest point since August 3. It later stood at $89.40, down $1.97 from Tuesday's closing level.
Brent North Sea crude for delivery in November retreated $1.65 to $108.80 a barrel in late afternoon trade in London.
"Reality has bitten back hard today as markets have once again woken up to the political and economic realities of the policies being pursued in Europe," said CMC Markets analyst Michael Hewson.
"Austerity protests in Spain last night have been followed by further protests and a general strike in Greece as population's tire of bearing the burden of spending cuts and tax rises against a backdrop of record unemployment and stagnant economies."
Amid ongoing eurozone woes, traders set aside data showing that American crude stockpiles unexpectedly plunged in the week ending September 21.
The US government's Energy Information Administration (EIA) said crude inventories sank 2.4 million barrels.
That confounded market expectations for a gain of 1.1 million barrels, according to analysts polled by Dow Jones Newswires.
"Today's moves came despite the latest EIA data," added GFT analyst David Morrison.
"But traders are more concerned about the demand outlook from China and Europe, and selling pressure built on reports of violence breaking out during today's strike in Greece.
"The unrest follows yesterday's violent protests in Spain. Demonstrators in both countries expressed their frustration at austerity measures which continue to exacerbate the already abysmally high levels of unemployment."
Oil prices continued to tumble in Wednesday afternoon deals as official data showed that sales of new homes in the US slipped slightly in August from July.
New home sales ran at an annual pace of 373,000 units last month, just 1,000 below the July pace.
"Crude oil prices have also tanked with US crude prices dropping below $90 for the first time since early August, not helped by the surprise drop in new home sales, though some of the downside has been tempered by a surprise drop in weekly inventories," added Hewson.
The market was also hit this week after a US Federal Reserve official questioned the ability of the central bank's recent economic stimulus plan to boost the world's biggest crude-consuming nation, traders said.
Charles Plosser, head of the Fed's Philadelphia branch, said Tuesday that he was doubtful the QE3 bond-buying programme would have great impact on charging up the US economy, and warned that the Fed could lose credibility.