Oil fell below $49 a barrel today, after reversing early losses in response to a rally in U.S. and European shares.

It had earlier fallen to a new 3-1/2-year low below $48, weighed down by gloom over the ailing world economy and its impact on fuel demand.

U.S. light crude for January delivery was down 54 cents at $48.74 a barrel. It earlier touched a new 3-1/2 year low of $47.36, its lowest since May 2005.

Prices had dropped nearly 10 percent on Monday.

London Brent crude was down 69 cents at $47.28 a barrel after touching a low of $46.02, its lowest since February 2005.

"The equity market has been a main input for oil," said Olivier Jakob, of consultancy Petromatrix. "Because the slowdown in oil demand is linked to the global economy - that's why the correlation is very strong."

Oil prices had tumbled on Monday after OPEC decided to wait until later this month to take more supply off the market to try to defend prices.

"OPEC was the key reason for the sell-off at first and then the poor performance on equity markets (on Monday) helped it follow through," said Rob Laughlin, oil analyst at MF Global in London.

OPEC has already cut supply by about 2 million barrels per day, but this has so far failed to bolster prices, which have fallen nearly $100 a barrel from a peak of more than $147 in July.

A Reuters' survey showed OPEC was overshooting its supply limits. In November, 11 OPEC members bound by output targets pumped 28.07 million barrels per day in November, above their November target of 27.3 million bpd, the survey found.

More bearish news could be in store on Wednesday, with U.S. crude oil inventories likely to have risen by 1.8 million barrels last week, a third consecutive weekly build, as imports continued to increase, a preliminary Reuters poll of analysts showed.