Oil dropped 4 percent to below $69 a barrel on Wednesday after U.S. government oil inventory data showed a surprise jump in crude and products stocks, highlighting the fragile state of demand in the world's largest energy consumer.

The U.S. Energy Information Administration's data showed commercial stockpiles of crude gained 2.8 million barrels last week, against analysts expectations of 1.5 million barrels fall, according to a Reuters poll.

Gasoline inventories rose 5.4 million barrels to 213.1 million, and distillates rose 3.0 million to a fresh 26-year high of 170.8 million, according to the EIA.

The EIA report is obviously very bearish. In my opinion, the report reflects the real state of the economy in which demand for refined products is very weak and so supplies are high, said Phil Flynn, analyst at PFG Best Research in Chicago.

U.S. crude for November delivery slumped $3.00 to $68.76 a barrel by 1512 GMT, off an earlier low of $68.57.

London Brent crude fell $2.71 cents to $67.82.

Oil prices were already lower prior to the release of EIA data after a report from the American Petroleum Institute, often seen as a precursor to the more authoritative EIA numbers, also showed a surprise crude inventory build.

The dollar came off a near one-year lows on Wednesday ahead of a Federal Reserve policy announcement later in the day, adding pressure to oil prices. Oil had had been spurred on by the falling dollar prior to the inventory reports.

Top oil exporter Saudi Arabia told Reuters in an interview on Tuesday demand for its crude was increasing, and that was reflective of the world's economy recovering from its worst recession since the Great Depression.

(Editing by William Hardy)