Oil plunges 5% on renewed economic fear

Oil prices plunged 5% on Thursday, the steepest one-day drop since July, as rising US unemployment claims and fear that debt-laden European economies may falter prompted a commodities sell-off.

US crude for March delivery settled down USD 3.84 a barrel to USD 73.14, while London Brent fell USD 3.79 to USD 72.13 a barrel.

The number of US workers filing initial jobless claims rose to a more-than-expected 480,000 last week, the Labour Department said.

A stronger dollar also cut investor appetite for oil, which is priced in the US currency. The greenback firmed to a seven-month high against the euro amid fears over the fiscal health of European economies including Greece, Portugal and Spain.

European Central Bank President Jean-Claude Trichet said Europe's economic recovery could be uneven and "subject to uncertainty."

US refinery utilization fell to 77.7% last week amid poor margins, the lowest since the 1980s except for periods of hurricane-related refinery outages, government data showed Wednesday.

"The underlying fundamentals are coming back to haunt us now, and oil is falling," said Gene McGillian with Stamford, Connecticut-based Tradition Energy. "Unemployment numbers were worse than expected and the euro came under pressure."

Oil prices were still slightly positive on the week, after closing below USD 73 a barrel last week. But oil has dropped more than USD 10 a barrel since closing at a 15-month high above USD 84 on Jan. 11, as fuel demand stagnates amid a sluggish economic recovery in the United States, the biggest consumer.

Trading volume on Thursday for front-month US oil futures, the most-traded oil contract, was the heaviest since Dec. 9, according to Reuters data.

The US Department of Energy said on Wednesday that US crude stockpiles rose sharply last week.

"Things are very bearish for crude. On the demand side, things are horrible," said Phil Flynn, analysts at PFGBest in Chicago.

Fears over Europe's economic health have been exacerbated by Greece's gaping budget gap of 12.7% of gross domestic product. The ECB's Trichet said he was confident that Greece can slash spending, and a Greek official said the country has no plan to seek International Monetary Fund assistance over its fiscal crisis.

"I think everybody is afraid this Greek crisis is going to spread throughout the world," Flynn said.

Other commodities dipped along with oil. Gold fell to a three-month low and copper futures slid to a 10-week low.

Investors sold off assets deemed riskier, including commodities and equities, and parked them in safe havens such as US Treasury bonds. Stock markets dropped around the globe, with the S&P 500 index falling more than 2.2%.