New York's main contract, light sweet crude for delivery in April, closed at $97.18 a barrel, down a hefty $4.01 from Monday's closing level.

In London, Brent North Sea crude for delivery in April slumped $5.15 to settle at $108.52 a barrel

"There is so much uncertainty in the markets at the moment," said Sucden analyst Myrto Sokou.

"The oil market is on a downtrend, tracking heavy losses in the global equity markets and a 10-percent collapse in Nikkei, amid serious concerns about a potential nuclear disaster in Japan," Sukou said.

"The market sentiment has been hurt and there is a serious lack of risk appetite right now that prompted investors to this heavy sell-off."

Japan, the world's third-largest economy, is also the number-three oil-consuming country. But its demand for crude oil is expected to drop in the aftermath of the worst earthquake in its history and a subsequent massive tsunami.

After several explosions at the Fukushima nuclear plant, radiation levels have risen and there are fears now of a major leak.

"Substantial radiation leaks will likely hamper reconstruction and economic activity resulting in reduced oil consumption," said Bjarne Schieldrop, chief commodities analyst at Swedish banking group SEB.

"This is the main concern pushing the oil price lower today."

Traders also were keeping an eye on growing unrest in Bahrain, a neighboring country to Saudi Arabia, the world's largest oil exporter.

At least 200 people were shot and wounded on Tuesday in a Shiite village south of the Bahraini capital, a medic said, as the king imposed a state of emergency after bringing in Saudi and Emirati troops to help quell anti-regime protests.

"It sounds to me like the Saudis are becoming very nervous about what might happen with the Shiite minority in Saudi Arabia," said Andy Lipow at Lipow Oil Associates.

Disruptions to oil production in Libya were also on investors' radar although the "industry probably factored in a long period without Libyan oil a week or so ago," said Philip Wiper, an analyst at brokers PVM.

Oil production has almost ground to a halt in Libya because of the country's unrest, the Paris-based International Energy Agency (IEA) said Tuesday.

The IEA, which provides energy policy advice for oil-consuming nations, added that there would be a marked economic slowdown should oil prices remain high.

Although prices are falling, they are still far above levels seen at the start of the year.

Current high oil prices "entail significant downside risks to this year's outlook," it said in its latest monthly report.

Brent crude has risen by around 50 percent in the last six months, first on very strong demand as global economies picked up post-recession traction, and then on "increased regional geopolitical risk in North Africa and the Middle East," the IEA said.

"If prices remain at current levels or rise further, by September 2011, if not before, the global economy may feature a marked slowdown," the report warned.

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