Oil fell nearly $2 to below $66 a barrel on Monday as investors became more cautious about the pace of global economic recovery and a potential revival in energy demand.

U.S. equities fell broadly, pressured by persistent concern for the global economy, with data from Japan, the third largest oil consumer, showing that economic recovery may be shaky.

U.S. crude oil futures for September fell $1.76 to $65.75 a barrel by 12:39 p.m. EDT (1639 GMT), after earlier hitting $65.23, the lowest since July 31. Brent crude for October lost $1.97 to $69.47.

The decline added to the market's $3.01, or 4.3 percent slide on Friday -- the biggest loss since July 29 -- after the Reuters/University of Michigan Survey of Consumers showed confidence in early August dropped.

Crude futures are down, following the stock markets. It looks like the economic optimism that we saw last week was overplayed as we saw a big bank fail and the market turned nervous on consumer confidence data, said Phil Flynn, analyst at PFGBest Research in Chicago.

The U.S. dollar rose against a basket of currencies as investors sought a safe haven away from commodities. Early stock falls in the U.S. followed on from losses in Europe and Asia. <.EU>

U.S. stocks opened lower, despite a gauge of manufacturing in New York state moved into positive territory in August, suggesting growth in the sector for the first time since April 2008.

Japan's economy emerged from its longest recession in at least 60 years in the second quarter, but analysts said it would be a long road to a sustained recovery in the world's third-largest oil consumer.

Although the Atlantic hurricane season, which can disrupt Gulf of Mexico oil and gas production, has arrived, analysts said brimming crude stockpiles in the United States would limit the impact of a storm on oil prices.

Hurricane Bill, the first of this season, is expected to strengthen to a major category 3 hurricane by Wednesday, possibly reaching the area of Bermuda early on Saturday, the U.S. National Hurricane Center said.

Tropical storm Claudette was downgraded to a tropical depression over southern Alabama, and tropical depression Ana was expected to reach the Dominican Republic later on Monday and could dissipate.

(Reporting by Gene Ramos and Robert Gibbons in New York, Alex Lawler in London and Fayen Wong in Perth; Editing by Marguerita Choy)

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