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Oil falls below $114 on euro zone uncertainty

LONDON - Oil dropped below $114 a barrel on Wednesday, with investors on edge over whether Europe would overcome its debt crisis, while Middle East tension kept the potential for supply disruption in focus.

Brent crude has recovered from a low of $88.49 reached in June to hit a three-month top last week on hopes of progress in Europe and worries about Iran.

But to sustain that momentum, oil dealers will need to see more concrete steps taken by central banks from Europe to China to stimulate their economies.

Brent shed over $1 and sank to a session low of $113.53. By 1138 GMT, it recovered to $113.80 - a loss of 84 cents. U.S. crude lost 30 cents to $96.54 per barrel.

There “might just be a little bit of profit-taking, given that we’re up at lofty levels and all we’ve got (from Europe) at the moment is dialogue, but they haven’t got any action or any follow-through,” said Ben Le Brun, a Sydney-based market analyst at OptionsXpress.

Stocks and currency markets have been rallying in recent weeks on speculation the European Central Bank is set to take steps to cap borrowing costs in Spain and Italy.

Greek Prime Minister Antonis Samaras is holding bilateral talks with leaders of France, Germany and the Eurogroup this week to seek concessions for its austerity-to-bailout swap. His first meeting is later this afternoon with euro zone chief Jean-Claude Juncker.

ESCALATING TENSION

Supply concerns continue to support prices, with escalating tension in Iran and Syria adding to worries over an expected cut in output from the North Sea because of maintenance operations.

Turkey is investigating possible Syrian links to a deadly car bomb attack near its southeastern border, underscoring fears that the conflict in Syria is fuelling instability in neighbouring countries.

The International Atomic Energy Agency (IAEA), a U.N. nuclear watchdog, will try to persuade Iran to address questions about its suspected nuclear weapons research at a meeting on Friday, more than two months after previous talks ended in failure.

The talks will take place just a few days before the agency is due to issue its latest quarterly report on Iran’s disputed nuclear programme.

Also supporting prices was data from the American Petroleum Institute on Tuesday.

U.S. crude stocks fell by a larger than expected 6 million barrels in the week to Aug. 17 as imports dipped, compared with analysts’ expectations for a 400,000-barrel drawdown.

Investors will also be looking to the minutes of the recent meeting of U.S. Federal Reserve policymakers for cues on the health of the U.S. economy.