Brent North Sea crude for June dropped 84 cents to $117.92 per barrel in London late morning deals.

New York's main contract, West Texas Intermediate (WTI) crude for delivery in June shed 77 cents to $103.11.

HSBC's China purchasing managers index (PMI), which measures factory output, rose to 49.1 in April from 48.3 in March but the reading remained below the key boom-or-bust 50-point level, indicating an improvement but no return to expansion just yet.

China's economy is closely watched by oil traders as it is the world's largest energy consuming nation.

"HSBC's PMI reading for China again showed a reading below 50 questioning the health of the world's second largest economy," said analysts at the Vienna-based JBC Energy consultancy in a research note to clients.

At the same time, a key survey on Monday showed that eurozone private sector activity sank at the fastest rate in five months in April, another sign of recession in the 17-nation monetary union.

The composite Purchasing Managers Index (PMI) compiled by the London-based research firm Markit fell to 47.4 from 49.1 in March.

Traders also took their cue from sliding European equities as investors sold off on the data which added to persistent eurozone debt tensions while the French presidential election results provided no comfort with incumbent Nicolas Sarkozy coming second in the first round to his Socialist rival.

Investors were also looking to a meeting of the US Federal Reserve's interest rate-setting panel on Tuesday and Wednesday amid fresh anxiety over the slow pace of recovery in the world's largest economy.

Analysts said the Fed meeting would decide whether more economic stimulus is warranted as high fuel prices, slowing job growth and Europe's debt problems have raised fears of another stumble.

Further aheah, markets will focus on more bond auctions in Italy and Spain, both of which have been hampered by concerns over elevated levels of state debt.

HSBC's purchasing managers index (PMI) -- which measures factory output -- was 49.1 in April, up from 48.3 in March, the British banking giant said in a statement.

But the reading remained below 50, indicating contraction in activity. A reading above 50 indicates expansion.

HSBC's chief economist for China, Qu Hongbin, put the data in a positive light, saying government measures to spur the economy were having an impact.

"This suggests that the earlier easing measures have started to work and hence should ease concerns of a sharp growth slowdown," he said in the statement.

But he added: "That said, the pace of both output and demand growth remains at a low level in an historical context and the job market is under pressure. This calls for additional easing measures in the coming months."

Other analysts echoed that view, saying the government will need to further ease monetary policy, most likely through a cut in reserve requirements for banks.

"The pick-up in PMI has reduced worries over China's economic growth, but it will not affect the overall loosening trend for China's monetary policy," You Hongye, an analyst at Essence Securities in Beijing, told AFP.

China's economy grew by 8.1 percent in the first quarter of this year, its slowest pace in nearly three years, putting pressure on Beijing to loosen its monetary policy.

Beijing has cut bank reserve requirements twice since December last year, as policymakers aim to boost lending.

Chinese shares closed down 0.76 percent on Monday as investors reacted to the PMI figure with disappointment, dealers said.

"Despite a mild improvement in April PMI, the reading is still in contraction, so it does not indicate a recovery in the domestic economy," Shen Jun, an analyst at BOC International, told AFP.

In a research report, securities house Nomura said China would boost spending on infrastructure and cut bank reserves as early as May.

"We still expect monetary and fiscal policy to be loosened in Q2," said Zhang Zhiwei, Nomura China chief economist.

HSBC's figures are typically more pessimistic than China's official numbers. The official data for April has not yet been released.

The HSBC survey puts more emphasis on smaller companies, which are suffering more in the economic downturn than state-owned giants.

The official Chinese government data released last month had shown manufacturing output rose to its highest level in a year in March, the fourth consecutive month that the official numbers indicated expansion.

China's economy is widely expected to slow this year as woes in key export markets such as Europe and the United States hit its overseas sales.

The government has set a target of 7.5 percent economic growth this year. China's economy grew 9.2 percent last year and 10.4 percent in 2010.