Oil falls more than $3 on euro zone debt woe

By Ikuko Kurahone

LONDON | Mon May 23, 2011 7:25am EDT

LONDON (Reuters) - Crude oil futures slipped more than $3 on Monday due to the peripheral euro zone's debt crisis, which pushed the dollar to a two-month high versus the euro and knocked broader equity markets lower.

North Sea Brent crude futures led the oil complex lower, trading down $2.91 at $109.48 a barrel by 1029 GMT, having dropped by $3.26 earlier.

U.S. crude was trading $2.63 lower at $97.46.

"The ratings cut for Italy and concern over Greek restructuring and the subsequent euro weakness appear to have prompted the price fall in crude this morning," Mark Thomas, head of energy Europe with brokerage Marex Financial, said.

The dollar rose against the euro as a block of bad news about the euro zone crisis hit the single currency.

Fitch Ratings cut Greece's debt rating by three notches on Friday, pushing the country's debt deeper into junk status, and rival Standard & Poor's cut its outlook for Italy to "negative" from "stable" on Saturday.

The euro fell below $1.40 briefly, the level which had been seen as an important support.

Olivier Jakob with Petromatrix said the euro would remain the key focus for global investors.

"Crude oil has not been able to find any follow-through buying over the last ten days and without new fundamental developments it is likely to be harder to find strong fresh buying into crude oil if the Euro weakens further," Jakob said.

European shares suffered the same fate as the euro, with the FTSEurofirst 300 index selling off 1.4 percent.

Risk aversion spread beyond Europe. World stocks as measured by MSCI were down more than 1 percent.

European airlines were sold because of the concerns over the volcanic ash cloud from Iceland.

The eruption of Iceland's most active volcano closed the island's main airport. Aviation authorities in Iceland said it hoped to reopen Keflavik airport later on Monday.

Other European nations watched for any impact on their air routes from a towering plume of smoke and ash.

But experts said they saw little chance of a repeat of last year's six-day closure of airspace, which also hit transatlantic flights, when another Icelandic volcano erupted.

(Additional reporting by Francis Kan in Singapore; editing by Keiron Henderson and Alison Birrane)