Oil prices dive in London and New York

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Oil prices plunged more than five dollars on Thursday, hit by a stronger dollar as investors flocked to the safe-haven currency on escalating fears about the weak economy and the threat of fresh recession.

Investors ran for cover a day after the US central bank warned of significant downside risks to the economy -- concerns that won support on Thursday in the wake of poor Chinese manufacturing data.

Fears for the world's two biggest economies added to new tensions surrounding the eurozone debt crisis, causing investors to head for the dollar as cover and sending equities and commodity prices slumping..

A strong greenback makes dollar-priced crude more expensive to holders of other currencies, softening demand.

Brent North Sea crude for delivery in November tumbled $4.71 to 105.65 in late London trading.

New York's main contract, West Texas Intermediate for November dived $5.22 to $80.70 a barrel.

"The oil market is on a downside momentum with serious lack of risk appetite," said Myrto Sokou, an analyst at Sucden Financial Research.

"In addition to the weak macroeconomic data, we have to acknowledge the lack of oil demand from the US and emerging markets, amid ongoing concerns about growth opportunities in the medium-term."

The US Federal Reserve on Wednesday unveiled a $400-billion stimulus plan to reduce long-term interest rates but investors chose to focus on its warning about the outlook for the world's biggest economy and oil consumer.

The Fed painted a grim picture of the economy, strapped with slow growth, high unemployment and a depressed housing market.

"There are significant downside risks to the economic outlook, including strains in global financial markets," the central bank's Federal Open Market Committee warned.

Analysts at Phillip Futures said that "after the Feds announcement, the rise in the dollar prompted investors to sell risk assets such as crude oil and stocks."

Data meanwhile showed that manufacturing activity in commodities-hungry China contracted for a third month running in September.

The HSBC preliminary purchasing managers' index (PMI) fell to a two-month low of 49.4 in September from a final reading of 49.9 in August, the British banking giant said in a statement on Thursday.

A reading above 50 indicates the sector is expanding, while a reading below 50 suggests contraction.

The debt crisis also weighed on oil prices and on Thursday the leaders of Australia, Britain, Canada, Indonesia, Mexico and South Korea urged the eurozone to tackle its mounting deficit problems.

In a joint letter to the G20, the six countries said there was a risk of contagion to the world economy if the governments of euro nations failed to confront the currency's spiralling troubles.

"Eurozone governments and institutions must act swiftly to resolve the euro crisis and all European economies must confront the debt overhang to prevent contagion to the wider global economy," the letter said.

At the same time, the European Central Bank warned that the eurozone crisis and persistent overspending by member nations could jeopardise the ultimate success of the single currency.

© 2011 AFP

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