The IEA had already made deep downward revisions to demand forecasts in its October report, warning that record-high crude prices were prompting consumers to seek alternatives.
Since then, U.S. oil has risen nearly 14 percent to around $94 a barrel -- triggering more demand destruction as oil nears triple digits.
"From a practical standpoint, hitting a round number may not confer any specific damage, but the cumulative $70 rise in price since 2002 is, we believe, having a cumulative effect," the Paris-based agency said.
"There are ... strong indications that high prices are depressing demand."
As a result, in its October and November monthly reports the IEA has slashed projected fourth quarter demand growth by nearly 900,000 bpd and cut growth in the first quarter by more than 200,000 bpd.
"This report wasn't a surprise. The bottom line is there's been virtually no demand growth in the U.S. since summer and a slow down in Chinese growth," said Mike Wittner at Societe Generale.
"These are warning flags and, on balance, any future demand revisions will probably be downward."
Oil deepened losses and was down more than $1 a barrel shortly after the IEA report was released. But at just under $94, the price for U.S. crude is not far off an inflation-adjusted high of $101.70 hit in 1980.
"The effects of high prices are starting to kick in," Lawrence Eagles, head of the IEA's Oil Industry and Markets Division, told Reuters.
"We are now starting to see signs in the U.S. that gasoline demand may be being affected by these high prices."
The IEA now expects world oil demand to average 87.1 million bpd in the last quarter of 2007, lower than the 87.6 million bpd anticipated in October. In the first quarter of 2008 the IEA now sees oil demand of 88.2 million bpd, against 88.3 million bpd in October's report.
The agency cut its world oil demand growth projection in the fourth quarter by 570,000 bpd to 1.46 million bpd. It reduced its growth forecast for the first quarter of next year by 180,000 bpd to 2.37 million bpd.
That will reduce the need for OPEC crude by up to 700,000 bpd in the fourth quarter of this year and up to 300,000 bpd in the first three months of next year, the IEA said.
After months of pressure from consumers led by the IEA, the Organization of the Petroleum Exporting Countries agreed to raise output by 500,000 bpd from November in an attempt to tame runaway prices.
The IEA now sees demand for OPEC oil in the fourth quarter running between 31.7 million bpd and 32 million bpd. According to the IEA, OPEC pumped 31.2 million bpd in October, up 410,000 bpd on the previous month.
Its latest revision brings the IEA's demand forecast for the fourth quarter in line with OPEC.
While major consumers are feeling the pinch of costly oil, the IEA said the economies of the Middle East and China -- which account for some two-thirds of global oil demand growth this year -- were immune to the effects so far.
"As long as the economies of those countries continue to grow strongly, we continue to expect them -- because of their accelerating oil demand growth position -- to have strong oil demand growth next year," said Eagles.