On the New York Mercantile Exchange, light sweet crude for December tumbled $US3.
08 lower to close at $US59.33.
Earlier the New York futures contract hit a low of $US58.32, a level last seen on March 21, 2007.
In London, Brent North Sea crude for delivery in December dropped $US3.37 to settle at $US55.71 on the InterContinental Exchange. In intraday trade it had plunged to $US54.92 per barrel – a level last seen on January 30, 2007.
Prices more than halved
Prices have shed about 60 per cent since scaling historic highs above $US147 in July on mounting evidence of slowing global economic growth and energy demand.
The market extended earlier losses in line with Wall Street's dive into negative territory, with investor fearing a collapse of General Motors and digesting more grim corporate news amid the credit crisis.
European stock markets closed sharply lower as corporate problems highlighted concerns about the spreading damage from the global credit crunch to the underlying world economy.
“The short-term focus continues to be on weak demand,” Barclays Capital analysts wrote in a research note to clients on Tuesday.
Crude oil prices closed almost two dollars higher on Monday, with sentiment boosted by hopes that China's huge economic stimulus package would lift demand for energy.
But traders banked profits on Tuesday as poor data from the US – the world's biggest energy consumer — reignited fears about recession.
“It eventually had to dawn on market participants that any Chinese economic stimulus would take time to work through an economy whose maladies are more immediate. Focus on these problems has been restored with the obvious result: prices are lower,” said John Kilduff, analyst at MF Global.
The oil market was also undermined by the strengthening US dollar which tends to dampen demand because dollar-priced crude becomes more expensive for buyers holding weaker currencies.
OPEC president Chakib Khelil indicated over the weekend the cartel may cut production again if oil prices remain below its preferred range of $US70 to $US90.
The Organisation of the Petroleum Exporting Countries (OPEC), which pumps more than 40 per cent of the world's crude, announced in October that its daily output would be cut by 1.5 million barrels per day to 27.3 million barrels per day from November.