A possible US credit rating downgrade has weighed on financial markets, adding to weak sentiment in palm oil futures that have lost 18 percent so far this year.

A turn to better crop weather in the US as well as bearish estimates for ample palm oil supply from top industry analyst Dorab Mistry further pressured the vegetable oil markets.

"Sentiment is really weak. We could be seeing more profit taking in the days to come but the hot weather has started to hurt soy yields in the US," said a trader with a foreign commodities brokerage.

"Also, stocks are growing in palm oil producers like Malaysia and Indonesia, so we are in for volatile trade," he added.

By midday, the benchmark October contract on the Bursa Malaysia Derivatives Exchange dropped 38 ringgit to 3,092 ringgit ($1,051) per tonne after going as low as 3,085 ringgit.

Traded volumes were light at 7,357 lots of 25 tonnes each, compared to the usual 12,500 lots as investors remained cautious.

Technicals were negative. Reuters analyst Wang Tao said Malaysian palm oil will fall further to 3,064 ringgit per tonne, as it has dropped below a rising channel.

Leading palm oil analyst Dorab Mistry said the market could drop as low as 2,800 ringgit in September as stocks in Malaysia remain stubbornly high.

Crude oil, a barometer for commodities and the global economy, fell further in Asian trade as US inventories rose and debate on raising the US debt ceiling before an Aug. 2 deadline to avoid default went unsettled.

US soyoil for August delivery fell 0.2 percent on Thursday, aided by rain relieving stressed crops in the United States although signs of improved China demand for soybeans limited losses.

China is likely to start importing more soybeans and vegetable oils from July after weak purchases in past months, said a Hamburg-based oilseeds analysts Oil World on Tuesday.

The most active May 2012 soyoil on China's Dalian Commodity Exchange fell 0.5 percent.

Copyright Reuters, 2011