Crude oil slid below $108 a barrel on Thursday as Cyprus struggled to raise enough money to qualify for a bailout and avoid a banking collapse, reigniting worries about the outlook for petroleum demand in Europe.
The European Central Bank has given the debt-laden Mediterranean island until Monday to raise billions of euros to clinch an international bailout or face losing emergency funds for its banks and their subsequent collapse.
"Definitely, the euro zone factors are weighing on crude," said John Kilduff, partner at Again Capital LLC in New York.
Adding to concerns about Europe, the euro zone's economic downturn has deepened in March - even before the Cyprus crisis became acute - data from survey compiler Markit showed.
The problems in Europe and the precarious situation in Cyprus countered support from more positive economic data from the United States, where existing home sales and leading economic indicators rose last month.
Cyprus is considering nationalising pension funds and is keeping banks shut until next week after it rejected a bank deposit tax required by a European Union bailout and turned to Russia for aid.
"The battle in Cyprus... is more noise from a commodity market perspective at least," said Filip Petersson, commodity strategist at SEB in Stockholm.
"But it makes the situation uncomfortable and is a sidetrack to the dominant bullish sentiment," he added.
Earlier in the session, manufacturing data from the euro zone showed a deepening downturn in the currency bloc, reinforcing negative market sentiment.
Flash euro zone manufacturing showed unexpected declines in March, driven by surprise weakness in the German and especially French purchasing managers' indices (PMI).
Most responses in Markit's business survey were received before Cyprus pushed the 17-nation currency bloc into fresh turmoil and analysts said respondents may now be even more gloomy.
The Flash Eurozone Composite Purchasing Managers' Index fell to 46.5 in March, lower than all forecasts in a Reuters poll of 23 economists.
Stronger data later in the session from the United States did little to reassure investors.
The number of Americans filing new claims for jobless benefits edged higher last week, but a trend reading dropped to its lowest in five years.
Business conditions in the U.S. Mid-Atlantic region rose to the highest level since September, according to a survey from the Federal Reserve Bank of Philadelphia and U.S. housing market data also pointed to a recovery.
Chinese data was also positive, as better-than-expected Chinese manufacturing figures pointed to an improved fuel demand outlook in the world's second-largest oil user.
"The Chinese data is better than expected but it's not extraordinary," said Olivier Jakob, oil analyst at Petromatrix in Zug. "Crude oil imports in China for the first two months were lower than last year."
In China, the HSBC Purchasing Managers' Index for March revived to 51.7 in March from 50.4 in February, but remained below a two-year high of 52.3 reached at the beginning of the year.
The reading is consistent with year-on-year GDP growth of around 8 percent, according to a Credit Agricole-CIB analyst, above the 7.5 percent GDP growth target for 2013 released at the annual legislative session this month.