Investors also looked past fighting in the Iraqi city of Basra, which accounts for most of the nation's oil exports. Officials said oil flows were not affected.
Analysts say the fact that the oil market is falling despite bullish news and a weak dollar is a sign that economic worries are becoming paramount for many investors, and that prices could fall further. Many analysts believe oil prices rose much higher in recent weeks than could be justified by supply and demand factors.
"This is the sort of development that would have powered a sharp rally back when crude oil was in full rally mode," said Tim Evans, an analyst at Citigroup Inc., of the Basra fighting.
Falling oil prices are pulling gas and diesel prices down from a series of records set earlier this month. The average national price of a gallon of gas fell 0.5 cent overnight to $3.255 a gallon, according to AAA and the Oil Price Information Service. Diesel prices slipped 0.3 cent to a national average of $4.026 a gallon.
Diesel, which is used to transport virtually all consumer goods and food, has likely peaked in price for the year, said Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service in Wall, N.J. In part that's because demand for diesel in Europe, which is much more reliant on the distillate fuel, has fallen.
Gasoline, on the other hand, may still rise another 10 to 25 cents a gallon this spring as suppliers stock up in advance of peak summer driving season. And that's likely to happen regardless of what happens with oil prices, Kloza said.
"I still believe there (will be) a run in gasoline independent of crude," Kloza said.
That's bad news for consumers already suffering from the effects of high food prices, falling home values and tight credit.
Other energy futures also fell Tuesday. April gasoline futures dropped 2.21 cents to $2.6191 a gallon on the Nymex, and April heating oil futures fell 9.91 cents to $2.864 a gallon. April natural gas futures dipped 3.6 cents to $9.293 per 1,000 cubic feet.
In London, May Brent crude fell 70 cents to $99.16 a barrel on the ICE Futures exchange.