Oil drops as US recession fears spark broader selloff

HOUSTON (Reuters) -Oil fell on Monday, trailing a stock market selloff sparked by fears of a U.S. recession, though declines were limited by Libyan supply losses and worries that a spreading conflict in the Middle East could further hit crude supplies.

Equities markets tumbled across Asia as investors rushed from risk assets while wagering that rapid interest rate cuts will be needed to drive U.S. economic growth.

Brent crude futures were down 66 cents, or 0.86%, at $76.15 a barrel by 9:58 a.m. CDT (1458 GMT), with prices earlier trading around their lowest since January. U.S. West Texas Intermediate crude was down 84 cents, or 1.14%, at $72.68.

Supply concerns limited losses. Libya's biggest oil field, Sharara, has fully halted output, Bloomberg reported. Two field engineers told Reuters on Saturday that local protesters had partially shut down the site.

U.S. recession concerns stoked by Friday's weak July jobs report weakened traders' confidence on Monday.

"The oil and product trade is going to be cautious as the market tries to get a handle on how bad the global market meltdown is going to be," wrote Phil Flynn, senior market analyst for Price Futures Group.

Slumping diesel consumption in China, the world's biggest contributor to oil demand growth, is also weighing on oil. The decline in oil prices closely trailed falls in European stock markets.

Oil's losses were also limited by geopolitical risks in the Middle East. Fighting in Gaza continued on Sunday, a day after an unsuccessful round of ceasefire talks in Cairo.

Israel and the U.S. are bracing for a serious escalation in the region after Iran and its allies Hamas and Hezbollah pledged to retaliate against Israel for the killings of Hamas leader Ismail Haniyeh and a top Hezbollah military commander last week.

"The risk of a wider regional war, while I still think is small, can't be ignored," said Tony Sycamore, a Sydney-based market analyst at IG.

(Reporting by Erwin Seba; Additional reporting by Paul Carsten and Alex Lawler in London and Florence Tan in SingaporeEditing by David Goodman, Jan Harvey and Paul Simao)