A stronger-than-expected reading of US July industrial output gave oil futures a fillip, but prices remained in the red ahead of a meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel on the future of the euro zone.

By 1324 GMT, September Brent crude futures were 64 cents lower at $109.27 a barrel, having plumbed earlier lows of $108.23. US crude fell by $1.10 cents to $86.78, having touched intraday lows of $85.62 a barrel earlier.

Some positive news came from the United States, where industrial output rose in July at its fastest pace in seven months and new housing starts fell by less than expected.

This was still overshadowed, however, by Monday's data that had showed a contraction in manufacturing in the New York area for the third straight month in August, dashing hopes for a rebound in the second half of the year.

"In the current economic climate we see, therefore, little sustainable upside in buying Brent above $110 a barrel," Petromatrix's Olivier Jakob said in a note to investors.

"All eyes are on this European meeting today, so it's going to be rather choppy and volatile ahead of that," GFT Global market strategist David Morrison said.

"(Oil is) reacting to the weakness in the euro, the strength in the dollar, and there is a general risk-off mode ... traders taking money off the table," he added.

Worries about the faltering economic recovery also gained prominence after data from European powerhouse Germany showed gross domestic product growth had slowed more than expected in the second quarter.

"The overall feeling looking at the Germany data is that the outlook for global growth doesn't look particularly good, in which case the upside to oil is capped into the medium term," Morrison added.

A firmer dollar index also weighed on oil prices. A stronger greenback renders commodities priced in dollars more expensive for holders of other currencies. The US dollar index against a basket of currencies was up 0.22 percent by 1326 GMT. The greenback had fallen to a near three-week low against the euro on Monday.

Concerns over the US recovery and the ongoing euro zone crisis have dragged down oil prices this month. Brent surged on Monday as hopes for a resolution to Europe's issues rose ahead of the Tuesday meeting between French and German politicians.

"We foresee further market volatility as the debt crisis remains a battleground," Standard Bank analyst James Zhang said in a note.

While the risk of a new US recession has risen over the last couple of months, Atlanta Federal Reserve Bank President Dennis Lockhart said on Monday that an outright contraction will most likely be avoided.

The World Bank also called for national governments to seek long-term debt curbs to solve the sovereign debt crises in Europe and the United States but said it was too early for special action by the Group of 20 nations.

SUPPLY CONCERNS

The shutdown of a North Sea oil well at a Royal Dutch Shell Plc field after an oil leak looks unlikely to affect supplies significantly from the home of the Brent oil benchmark, oil traders said on Monday.

In the United States, crude oil stock piles are expected to have fallen for a second straight week due to lower imports, a preliminary Reuters poll showed on Monday ahead of weekly inventory data.

Supply disruptions caused by the ongoing fighting in Libya are expected to underpin prices, despite the worries on the economic front.

Forces loyal to Muammar Gaddafi fired a Scud missile for the first time in the country's civil war, a US defence official said, after rebel advances left the Libyan leader isolated in his capital.

"We continue to believe that the return of Libyan crude supplies to the market will be seen in 2012 and as such any sell-off associated with headlines of a regime change in the country provide consumers with a good hedging opportunity," J.P. Morgan analysts said in a report on Monday.

In Syria, where a five-month-long street uprising against President Bashar al-Assad's autocratic rule has so far had little impact on the country's 400,000 barrel per day oil production, the military broadened its assault over the weekend to try to put down protesters.

Copyright Reuters, 2011