Oil near six-week low on demand woes

SINGAPORE (Reuters) - Oil prices held near a six-week low on Wednesday, as worries increased over dwindling U.S. demand at the same time as fears eased Hurricane Dolly would deal a major blow to oil and gas supply.

A rebound in the dollar on the back of comments from a Federal Reserve official suggesting U.S. interest rates may have to rise also reduced the appeal of commodities, prompting investors to exit oil.

U.S. light crude for September delivery fell 12 cents to $128.30 a barrel after it fell as low as $125.63 a barrel in intraday trading on Tuesday -- its weakest since early June.

London Brent crude slipped 25 cents to trade at $129.30 a barrel by 2:12 a.m. British time.

The fall in U.S. crude extended losses from the July 11 record high over $147 a barrel that marked the steepest price fall in dollar terms in oil's history -- leading some analysts to question how soon the market will resume its six-year rally.

"The decline in oil prices reflects concerns that slower economic growth in the U.S. and high oil prices are crimping oil demand," said David Moore, commodity strategist at Commonwealth Bank of Australia.

Mounting economic woes in the United States and continued lacklustre energy demand from the world's biggest consumer nation were key factors behind the drop in oil prices, dealers said.

Oil is however still up almost 30 percent this year and more than six times higher than in 2002, in a rally driven by booming demand from fast-growing Asian economies such as China.

Remarks by Philadelphia Fed President Charles Plosser that rising inflation could force the Fed to start raising interest rates even before financial markets recover amid a surge in inflation, supported the dollar, in turn hitting crude.