Oil fell sharply on Thursday with North Sea Brent crude down more than 3 per cent on concerns over global fuel demand following forecasts of lower US growth and evidence of a slowdown in Chinese manufacturing.

Commodities and stock markets dropped across the board after the Federal Reserve on Wednesday cut its growth forecasts for the world's biggest economy.

Federal Reserve Chairman Ben Bernanke offered no hint the US central bank was considering any more stimulus to accelerate growth, a move that disappointed many commodity investors and weighed on markets from gold to oil.

"I can't see anything on the bullish side for oil," said Robert Montefusco, broker at Sucden Financial in London.

"Prices have been too high for too long and all the fundamentals point to a weaker market. I don't think we will see a crash, but everything says oil is too high."

The dollar rose against other major currencies, putting further pressure on oil, which often moves inversely to the US currency. Weak Chinese data also sapped prices, analysts said.

China's factory-sector growth was close to stalling in June even as price pressures eased, reflecting the impact of tightening in monetary policy and slack global demand.

Brent fell $3.59 to a low of $110.62 a barrel before recovering to trade around $111.00 by 1200 GMT, after settling $3.26 a barrel higher at $114.21 on Wednesday.

US crude slipped $2.76 to a low of $92.67.

"The Federal Reserve has confirmed that the economy is slowing," said Christophe Barret, global oil analyst for French bank Credit Agricole. "Demand for oil is slowing and oil at these levels is still very expensive."

"All the factors are negative: quantitative easing is coming to an end, we are seeing a Q2 slowdown, Chinese data is poor, inflation is rising. Everything is pushing prices down.”

Jonathan Barratt, managing director of Commodity Broking Services, was also negative on the short-term outlook, saying the Fed comments suggested there was little prospect of much higher growth for a long time.

"Growth, in terms of employment and the economy, will remain stagnant for some time and that is not a good thing," he said.

The Federal Reserve estimated the US economy should grow 2.7 per cent to 2.9 per cent this year, down from a range of 3.1 to 3.3 per cent forecast in April. It also cut its 2012 growth forecast to a range of 3.3 per cent to 3.7 per cent.

Oil rose 3 per cent on Wednesday, boosted by data showing a drop in US crude and a surprise draw in gasoline inventories.

Gasoline inventories unexpectedly dropped 464,000 barrels to 214.6 million barrels, compared with predictions of a 1 million barrel build, according to data from the US Energy Information Administration's weekly report. Crude stocks fell 1.7 million barrels as refinery utilization increased by the most since December to hit a ten-month high.

On Thursday, markets will watch for data on jobless benefit claims due at 1230 GMT. More importantly, they will look for signs of how the broader economy is faring, with the final estimate of the nation's first quarter real GDP due on Friday.

Analysts said oil was also likely to remain under pressure due to uncertainty surrounding Greece and the broader euro zone debt crisis, which has raised questions over the outlook for European economic growth.

"The euro is coming under pressure again and there is talk of risk for European banks," said Montefusco. – Reuters