It had earlier fallen to a new 3-1/2-year low below US$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 US$48.74 a barrel by 1606 GMT. It earlier touched a new 3-1/2 year low of US$47.36, its lowest since May 2005.

Prices had dropped nearly 10 percent on Monday.

London Brent crude was down 69 cents at US$47.28 a barrel after touching a low of US$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.

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