US light crude for November delivery fell $3.12 to $86.94 a barrel by 1007 GMT. Earlier it had fallen by more than $4 to $86.05, its lowest level since Dec 6, 2007.

London Brent crude fell by $2.86 to $81.80 a barrel.

The slide was in line with weakness across financial markets, which registered deep losses even after British Prime Minister Gordon Brown and Finance Minister Alistair Darling held a joint news conference to outline a 50 billion pound rescue package for British banks.

Darling said he wanted to reduce the "fear factor" in the banking system, but it was not enough to stop Britain's top share index the FTSE 100 from falling by 6.8 per cent.

Earlier, Hong Kong's decision to slash its main interest rate by 100 basis points -- the biggest cut since the benchmark started a decade ago -- failed to support Asian markets.

"This morning has been totally dominated by financial markets. Weak stock markets and poor economic outlook seems to be main driving force." said Tony Machacek, an analyst at MF Global.

"This morning's comments from Gordon Brown and Alistair Darling don't appear to have given an obvious boost and with financial markets in a major tailspin, it is difficult to see an end to this downward trend in crude prices."

Later on Wednesday, attention will turn to oil inventory data from the US government's Energy Information Agency (EIA), expected to be released at 1435 GMT. An increase in inventories could put further pressure on crude prices.

Crude stocks probably rose for the second week in a row last week as imports continued to rebound after storm disruptions, a Reuters poll of 11 analysts showed.

Underlining the impact of the financial crisis on fuel use, the EIA on Tuesday cut its oil demand growth outlook for next year by 15 per cent from a forecast made last month, blaming the deteriorating global economy.

Signs members of the Organization of the Petroleum Exporting Countries (OPEC) have become uneasy about oil's sharp price drop also failed to hold up prices, following a $2 a barrel rise on Tuesday.

Libya joined fellow OPEC members Iran and Iraq in expressing concern this week about the impact of the crisis on oil demand.

"If this volatility continues, OPEC will have to do something," Shokri Ghanem, chairman of Libya's National Oil Corp, told Reuters on Tuesday.