Oil closed at $15.20, dropping to a three-month low Friday as the dollar surged and concerns about global economic growth weighed on demand expectations.
The fall came even as Russia sent forces into Georgia, a key energy transit region, to repel a Georgian assault on the breakaway South Ossetia region.
U.S. light, sweet crude pared some losses after hitting $115.61, the lowest level since early May. The drop added to losses that have sent prices down from a record high over $147 a barrel on July 11. Crude lost 7.9 percent for the week.
London Brent crude traded down sharply as well.
"It seems that we've got a lot of selling based on the stronger dollar," said Peter Beutel, president of trading consultants Cameron Hanover.
"Energy demand destruction and the dollar return have formed a quiet alliance to bring the oil market down, and today the louder of the two is the dollar."
Strong demand from emerging economies like China sent oil on a six-year rally, with prices up sevenfold at their peak.
More support came from investors rushing into commodities as a hedge against inflation and the weak dollar.
But mounting global economic problems and high fuel prices have begun to hurt demand, weighing on prices.
The dollar surged against the euro and was on track for its biggest one-day gain in four years as concerns mounted that the U.S. economic slowdown was spreading to the euro zone and around the world.
"The market has been ignoring the Tbilisi pipeline situation, and now the problems with Russia -- the move lower really now has a momentum of its own with the financial players coming out," said Olivier Jakob at Petromatrix.
Georgia's pro-Western president said Friday the two countries were at war as Georgian troops backed by warplanes pounded separatist forces in South Ossetia and Russia sent forces to repel the assault.
Analysts were concerned fighting could disrupt energy exports from the Caspian region that travel through Georgia.
Oil had risen on Thursday due to the disruption of supplies through the Baku-Tblisi-Ceyhan pipeline following a blast this week in Turkey.
The pipeline was still burning, halting loadings of Azeri Light crude shipped to the Turkish port of Ceyhan, but the fire could be extinguished on Friday or Saturday.
Once the blaze is out, the pipeline could be reopened within 10 days. BP has cut output by at least 400,000 barrels a day at the Azeri-Chirag Gunashli oilfields, traders said.