Oil fell more than 4% on Monday, extending declines that followed Iran's release last week of 15 British sailors and marines.
The release last Thursday of the British sailors and marines eased simmering tensions between the West and Iran, the world's fourth biggest oil exporter.
The two-week detention of the UK military personnel had driven U.S. crude oil prices from around $60 to above $68 a barrel, their highest since September last year.
U.S. crude settled down $2.77 or 4.3% to $61.51 a barrel in trade subdued by the Easter holiday. It was the biggest single day drop since August 17, 2005.
Brent maintained a premium of nearly $5 over U.S. crude partly due to relatively high supplies of U.S. crude at the key Cushing, Oklahoma supply hub.
Gasoline dropped a comparatively small 3.42 cents or 1.6% to settle at $2.0946. Heating oil fell 4.52 cents or 2.4% to settle at $1.8157.
But concerns about Iran's uranium enrichment program, as well as the conflict in Iraq still underpin oil prices, which are well above this year's lows of $49.90 a barrel in January.
"'Iranium' remains a hot issue and, as importantly, the lack of an Iraqi solution will continue to haunt the Middle East for months to come," said Olivier Jakob, from oil industry consultants Petromatrix.
The energy markets are also keenly eyeing U.S. gasoline supplies leading into the summer driving season. Stockpiles of the key motor fuel have dropped nearly 10 percent since early February amid refinery outages.
"There are fears of a tight U.S. gasoline market over the summer," said Christopher Bellew, senior vice president at Bache Commodities.
Iran President Mahmoud Ahmedinejad announced on Monday his country has begun the first stage of what it calls "industrial scale" uranium enrichment, which the West fears could be used
to make nuclear weapons.
Tehran has rejected United Nations demands to halt enrichment, instead pressing ahead with a nuclear program it calls peaceful.
Members of the Organization of the Petroleum Exporting Countries (OPEC) insist the global oil market is well supplied and high prices reflect tensions over Iran rather than any shortage.
Iran's Oil Minister Kazem Vaziri-Hamaneh said 1.7 million barrels per day in oil supply cuts that OPEC agreed last year had balanced the market.
"After the OPEC decisions to cut, which have been fairly well implemented, we see stability in the market," he said on the sidelines of a gas meeting in Qatar, attended by seven of OPEC 12 members.