Oil prices dropped more than $1 on Friday as the deteriorating global economic outlook stoked concerns that crude demand will continue to shrink.

U.S. crude futures for March delivery, which expire on Friday, fell $1.13 to $38.35 a barrel by 1228 EDT (1728 GMT), after posting the biggest settlement gain since Dec. 31 in the previous session.

Brent crude fell $1.09 to $40.90 a barrel.

The losses tracked weakness in U.S. stocks, which fell sharply led by banking shares on fears that a U.S. bank rescue plan might lead to nationalization.

Economic news was grim outside the United States as well, with European shares hitting a six-year low as investors fretted about capital increases and bank nationalization on the back of a deepening economic downturn.

The broad Topix index of Japanese shares closed at its lowest level in about 25 years.

A rally in gold, a traditional safe haven for investors, to over $1,000 an ounce, its highest since March of last year, also added pressure to oil prices by drawing investors away from riskier markets, dealers said.

Oil prices had rallied strongly on Thursday, jumping 14 percent after data showing an unexpected draw in U.S. crude stocks. But worries over the health of oil demand have resurfaced, with sentiment dented by sharp falls in equity markets.

“There were some signs (in inventory data released Thursday) that oil may be stabilizing, at least demand. But this morning crude oil is lower and the market is still looking at the weakness of the economy.” said Peter Beutel, president at Cameron Hanover in New Canaan Connecticut.

Crude inventories in the United States, the world’s top consumer, fell slightly last week on lower imports and higher demand, the U.S. Energy Information Administration said, snapping seven straight weeks of builds against market expectations.

Crude prices have fallen more than $100 a barrel from the peaks hit last July as the worsening economic crisis has bitten into oil demand, prompting the Organization of the Petroleum Exporting Countries (OPEC) to agree to deep output cuts.

In the latest indication that OPEC members are complying with the agreed cuts, Kuwait notified at least two buyers in Asia that it will keep curbs of 5 percent below contracted volumes for April-June term crude oil supplies, steady from March, trade sources said.

Source: NEW YORK, Feb 20 (Reuters)