New York's main contract, light sweet crude for delivery in October, fell 66 cents to 69.95 dollars per barrel in pit trading after earlier falling as low as 69.30 dollars -- the weakest level since June 21.

In London, Brent North Sea crude for October delivery dived 89 cents to 69.93 dollars per barrel in electronic trading. It sank earlier to a low of 69.48 dollars which was last seen on June 26.

Crude futures had closed down almost two dollars on Monday after Hurricane Ernesto was downgraded to a tropical storm, reducing concern about possible damage to US oil installations in the Gulf of Mexico.

The National Hurricane Center forecast Tuesday that Ernesto would hit Florida on Wednesday, but said that it would not return to hurricane strength as had been feared.

"The main factor in this marked (price) weakness in the oil and refined product sector is a downgrading in intensity and very substantial eastward shift in the projected path of tropical storm Ernesto," Barclays Capital analyst Kevin Norrish said on Tuesday.

"Its projected path now takes it over Florida and although some strengthening is expected after Ernesto moves into the Florida straits, markets have now discounted its significance."

The market was also calmed by news that BP has resumed some lost output at its Prudhoe Bay oil field, where closure earlier this month due to a pipeline leak had sent London Brent crude prices soaring to record high.

According to a BP spokesman, Prudhoe was now pumping some 200,000 barrels per day (bpd) -- or around half its normal production of 400,000 bpd.

The British energy giant had last week slashed output at the troubled field to about a quarter of the normal level because of a new technical problem.

Prices on Tuesday were also weaker amid apparent willingness by Iran to negotiate over its disputed nuclear programme.

Analysts warn that Iran, the world's fourth biggest producer of crude, could disrupt its oil exports if hit by UN-backed economic sanctions over the programme.

In line with a UN Security Council resolution, the United States and its European allies are insisting that Iran must stop enriching uranium by August 31 or face the threat of sanctions.

Washington accuses Tehran of aiming to build a nuclear bomb but Iran insists its nuclear programme is peaceful.

Meanwhile in Iran's neighbour Iraq, at least 74 people were killed on Tuesday when an old fuel pipeline caught fire near the southern Iraqi city of Diwaniyah, officials said.

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