Oil fell towards $69 on Tuesday on growing concern that Europe's debt crisis would derail the global economic recovery, prompting investors to sell riskier assets in a flight to dollar safety.

The greenback gained more than 0.6 per cent against a basket of currencies on Tuesday, while Japan's Nikkei average fell 3.06 per cent to its lowest in more than five months following a steep drop in Wall Street.

"The market got ahead of itself, building in a lot of anticipation that the economy and oil demand would recover," said Tony Nunan, a risk manager with Tokyo-based Mitsubishi Corp, referring to US crude's 19-month high above $87 hit in early May.

"The fact that the dollar is strengthening is a sign of risk aversion and deleveraging. People are moving away from crude oil," Nunan said, adding that Fibonacci chart analysis showed prices would head towards $66.24.

US crude for July delivery fell $1.07 to $69.14 a barrel at 0408 GMT. ICE Brent crude slid $1 to $70.17.

Europe's fumbling response to a debt crisis in Greece and bulging deficits in other euro zone countries has unnerved markets over the past six weeks, and the central bank takeover of a small Spanish lender at the weekend stoked fears of a wider meltdown.

The crisis has overshadowed positive economic indicators showing that emerging and OECD nations are returning to growth after the worst recession of the post-war era.

"A lot of the economic indicators are positive, but the reality is that we have to admit that oil supply is keeping ahead of demand," Nunan said.

Last Thursday, US crude prices touched $64.24, the lowest for a front-month contract since prices fell to $62.76 on July 30, 2009.

"Demand is recovering, but Opec has been slipping steadily over its production target," Nunan said.

Most estimates suggest production from Opec has been rising since early 2009 as higher oil prices have encouraged members to relax adherence to output cuts announced in December 2008.

Opec's compliance with the 4.2 million bpd of promised cutbacks has fallen to around 51 per cent, according to Reuters estimates.

Opec is very worried about the fall in oil prices and is watching developments in the market closely, but it is too early to say if the producer group needs to take any action, Libya's top oil official said on Monday.

A preliminary Reuters survey showed analysts were divided over the direction of US oil inventories last week. The poll of six analysts called for an average drawdown of 100,000 barrels, but the group was evenly divided on how inventories shifted.

Distillate stockpiles including heating oil and diesel probably climbed 300,000 barrels, the poll showed, while views were mixed on whether gasoline supplies shrank or grew.

The analysts issued their forecasts ahead of weekly inventory data from industry group American Petroleum Institute, due on Tuesday at 2030 GMT, and government statistics from the Energy Information Administration scheduled at 1430 GMT on Wednesday. – Reuters