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Oil prices fell nearly 2 percent on Monday after No. 3 consumer Japan suffered an economic contraction in the second quarter and China's slowdown continued to weigh on oil market sentiment.

The dollar also strengthened following the fastest pace of growth in U.S. industrial output in eight months, making greenback-denominated commodities, including crude, less affordable for holders of other currencies such as the euro.

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U.S. crude, or West Texas Intermediate (WTI), settled down 63 cents, or 1.5 percent, at $41.87 a barrel. Expiring options trade in U.S. crude bumped up the market's volume to above 160,000 lots by midmorning, versus Friday's total of about 300,000 lots.

Brent futures for October were down 50 cents at $49 a barrel. It earlier hit a session low of $48.35, about $3 above its January low of $45.19.

Oil's slide continues

Japan's economy shrank at an annualized pace of 1.6 percent in the April-to-June period as exports slumped and consumers cut back spending, adding pressure on Prime Minister Shinzo Abe to step up his policy drive to lift the economy out of decades of deflation.

China fixed its exchange rate slightly higher for the second day running, after last week's surprise devaluation that sliced 3 percent off the yuan and sparked speculation about the impact on global currencies.

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"The general talk in the market is about the continued ripple effect from the Chinese devaluation. How it may affect other nation's economies linked to China," said David Thompson of Washington-based energy-specialized commodities broker Powerhouse.

Oil has fallen around 30 percent since June.

U.S. crude has fallen for seven weeks in a row, settling down again last week after another weekly rise in U.S. oil rig additions on Friday that hinted at growing production.

While Brent has fared relatively better versus the selloff in U.S. crude, it also has been pressured by data showing a continuous glut in global oil supply, such as Oman's record-breaking production of 1 million barrels per day in July.

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Demand for crude is set to fall further in the next few weeks as U.S. and European refineries start maintenance for autumn.

Money managers and hedge funds have cut their combined net long positions in U.S. crude to 2010 lows and in Brent to December 2014 lows, in an apparent growing consensus that oil prices will likely remain low for a while, data shows.