Oil steadied near $96 a barrel on Tuesday after a near 10 percent drop in the previous session in the wake of the shock rejection by U.S. lawmakers of a $700-billion financial sector rescue plan.
Asian stocks posted the biggest monthly decade in more than a decade and major European stock markets lost further ground after Monday's steep slide.
Traders expect oil demand to suffer as the economy weakens.
"For energy prices, I fear additional downside in values is still around the corner," said Rob Laughlin, an oil broker at MF Global.
"There is no doubt that oil demand is going to suffer as the global recession bites and geopolitical unrest remains on the backburner, so a test lower is highly likely."
U.S. crude was up 1 cent at $96.38 a barrel by 0908 GMT, after losing $10.52 on Monday to $96.37 — the second biggest fall since April 23, 2003. London Brent crude was down 3 cents at $93.95.
On Monday, the U.S. House of Representatives voted 228 to 205 against a bailout plan that would have allowed the Treasury to buy up toxic assets from banks. The rejection of the plan sent global stock markets sliding.
"It's just reinforcing the belief that the U.S. economy is really heading towards a downward spiral. That means the demand side of the equation for oil will deteriorate rapidly," said Toby Hassall, chief analyst at Commodity Warrants Australia in Sydney.
"It's just getting worse and worse and no one knows when this is going to end."
Oil has fallen sharply from a record high of $147.27 reached in July on signs that high energy prices and the financial crisis have cut into crude demand in the United States and other industrialised nations.
In addition, oil has also been dragged down as investors, who had rushed into commodities earlier this year as a hedge against inflation and the weak dollar, sold crude for safer havens.
Analysts said the spread of credit problems to Europe was also stoking fears that the financial turmoil, which started with risky lending to the overheated U.S. property market, had gone rapidly global.
"Slower international economic growth is bound to dent oil demand," said David Moore, a commodities analyst at the Commonwealth Bank of Australia.
