Oil rebounds over $109 after Fed cuts rates

By Richard Valdmanis

NEW YORK (Reuters) - Oil prices rebounded sharply on Tuesday to over $109 a barrel after the U.S. Federal Reserve deepened interest rate cuts to fend off a recession.

The surge reversed heavy losses Monday that had been triggered by financial woes at investment banks, including Bear Stearns, which analysts said reflected weakness in the overall economy of the world's largest energy consumer.

U.S. crude CLc1 rose $3.74, or 3.54 percent, to settle at $109.42 a barrel after sliding more than 4 percent on Monday in the biggest one-day percentage drop in more than seven months. London Brent LCOc1 gained $3.81 to $105.56.

The Federal Reserve slashed a key U.S. interest rate by three-quarters of a percentage point on Tuesday, a substantial cut but smaller than many in financial markets had expected.

"After the initial disappointment, I think it leaves the door open for more cuts down the road," said Mike Fitzpatrick, vice president of MF Global.

The Fed's action took the bellwether federal funds rate down to 2.25 percent, the lowest since February 2005.

Aggressive interest rate cuts have contributed to a steep decline in the value of the U.S. dollar -- a factor that has supported gains across all commodities denominated in the currency in recent months.

Encouraging oil's gains on Tuesday, Wall Street firms Goldman Sachs Group Inc (GS.N) and Lehman Brothers Holdings Inc LEH.N reported better-than-expected earnings.