Broader financial markets consolidated after sliding on fears that the rise in oil to near 10-month highs last week would further strain the economies of Europe, already struggling with a debt crisis. Brent has risen more than 11 percent this month, the most since May 2009.

Front-month Brent fell 41 cents to $123.76 a barrel by 0733 GMT, after settling more than $1 lower on Monday. US crude slipped 29 cents to $108.27 a barrel, after ending more than $1 lower and snapping seven straight days of gains in the previous session.

"People were worried about the quick move in prices, they just sped up too fast," said Tetsu Emori, a fund manager with Astramax Co. in Tokyo.

"We may see some more correction and participants repositioning themselves before prices start to rise again."

Brent may slip to $120 a barrel, while US crude may fall to $105 before finding support, Emori said. Oil may rise after that as tensions with the West over Tehran's disputed nuclear programme continue to escalate, he said.

The surge in prices, an increase of more than 3 percent in January for Brent in addition to the 11 percent this month, has already prompted the International Monetary Fund to flag oil as a rising threat to the global economy.

"There has been no change. In fact, the fundamentals are getting much more tighter," said Emori.

Brent will average $110.3 a barrel this year, according to a Reuters monthly oil poll, up from January's estimate of $107.30 due to fears of a loss of Iranian supplies.