Oil slipped from its highest price this year near $55 a barrel on Tuesday as bulging oil inventories and falling energy demand outweighed fragile hopes for an economic recovery.

The intraday high came a day after the market posted this year's highest settlement driven by an equities rally on optimism that the economy may be starting to recover, despite what many see as bearish oil fundamentals of supply, demand and inventories.

Even though oil markets are trading near highs of the year so far, the market still feels nervous about sustaining the highs. Fundamentals still don't justify prices, said Tom Bentz of BNP Paribas Commodity Futures Inc.

U.S. crude was down 70 cents to $53.77 a barrel at 1458 GMT (10:58 a.m. EDT), having earlier risen as high as $54.83, topping the previous 2009 high of $54.66. London Brent was down 62 cents at $53.96.

European shares were at their highest in nearly four months by midday on Tuesday on hopes that U.S. government stress tests on banks would reveal only modest capital shortfalls. Wall Street was lower.

The dollar rose against a basket of other major currencies in a choppy session. <.DXY> A stronger dollar can limit the appeal of oil and other dollar-denominated commodities to some investors.

Oil has been trading between $44 and $55 for the past two months, having recovered from $32.40, the lowest since early 2004, in December. It remains down sharply from the record high above $147 reached in July, 2008.

Positive economic signs from China and India have also helped support oil.

A Chinese manufacturing index based on a poll of industry executives conducted for Hong Kong-based brokerage CLSA rose to a nine-month high of 50.1 in April from 44.8 in March.

India's factory activity expanded in April for the first time in five months, according to the ABN AMRO Bank purchasing managers' index.

Some point out that despite oil's rise, its fundamentals of remain bearish.

A Reuters poll of seven analysts forecast U.S. inventory reports due this week would show crude stocks probably rose for the ninth consecutive week last week, leaving them at a near 19-year high.

The poll also showed an average forecast for a 1.0 million barrel increase in distillate stocks and a 700,000 barrel rise in gasoline supplies.

We're back into the same sideways range, albeit the top of it, said Christopher Bellew, a broker at Bache Commodities. It's too early for the market to break to the upside with stocks so high.

(Additional reporting by Maryelle Demongeot in Singapore and Robert Gibbons in New York; Editing by James Jukwey)

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