New York's main contract, light sweet crude for delivery in July, shed 74 cents to 71.29 dollars per barrel in closing trades after trading as low as 70.05.

In London, Brent North Sea crude for July delivery sank 64 cents to finish at 70.41 dollars per barrel.

The United States, in a major policy shift, said it was ready to join direct talks on Iran's nuclear program if Tehran suspended uranium enrichment activities.

Bill O'Grady at AG Edwards said the news on Iran was "the primary factor driving the market."

"If Iran takes the deal, tensions will ease and oil prices will likely decline," the analyst said. "If Iran refuses the deal, the path to sanctions and war looks set."

US Secretary of State Condoleezza Rice made the offer of the first substantive talks with Iran since diplomatic relations were broken off 26 years ago as she prepared to leave for a crucial meeting of world powers in Vienna on Tehran's suspected nuclear arms program.

"To underscore our commitment to a diplomatic solution and to enhance the prospects for success, as soon as Iran fully and verifiably suspends its enrichment and reprocessing activities, the United States will come to the table with our EU-3 colleagues and meet with Iran's representatives," she said.

The market is concerned that Iran -- the world's fourth-biggest producer of crude -- could halt exports should the United Nations impose sanctions over the nuclear program which the Islamic republic insists is strictly for civilian energy production. The West, however, suspects Tehran is planning to build nuclear weapons.

The market also expected the Organization of Petroleum Exporting Countries (OPEC) would stick with the oil cartel's current production quotas when it meets Thursday.

OPEC ministers meet in Caracas to decide production levels but delegates have indicated the 11-member oil cartel will keep its official production quota intact.

The oil cartel has an official production quota of 28 million barrels of day, its highest level in 25 years.

"It looks like (OPEC) are not going to reduce production levels (so) the market has sold off," said Tony Nunan, a Tokyo-based energy risk manager for Mitsubishi Corp.

The US Department of Energy also unveils its weekly market update on crude inventories on Thursday, one day later than normal owing to the Memorial Day public holiday on Monday.

"Crude prices have gotten a little ahead of themselves over the last few days and a pullback could be in order, especially if we get another pattern of product builds (Thursday)," said Man Financial analyst Ed Meir.

Dealers expect that a build-up in US gasoline or petrol supplies, amid the start of the American driving season which sees US holidaymakers take to the roads, will ease supply concerns.

Crude futures had jumped on Tuesday as traders tracked the latest developments over the Iranian nuclear energy dispute, while absorbing new data pointing to buoyant Chinese energy demand.

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