New York's main contract, West Texas Intermediate light sweet crude for delivery in September, dived $2.40 to $79.98 a barrel.

Brent North Sea crude for October delivery dropped $1.15 to $105.84.

"Fear holds financial markets in a tight grip at the moment and considering the many challenges currently facing most regions of the world and the threat to the continued recovery this is not surprising," said Filip Petersson, an analyst at SEB Commodity Research.

"With no major economic events scheduled for today there is little that could stabilise the situation or turn sentiment around."

US investment bank Morgan Stanley on Thursday warned that the United States and Europe stood dangerously close to recession and that growth in the big emerging economies would be slower than expected.

"We are seeing a very diminished demand picture," said oil specialist John Kilduff at Again Capital. "You're seeing a considerable shift away from the outlook that the economy is going to grow in the second half and next year."

The growth picture was also hurt by poor to outright gloomy US economic data on jobs, inflation, housing sales and regional manufacturing released Thursday.

Copyright AFP (Agence France-Presse), 2011