Oil near $96 on equity rout

By Felicia Loo

SINGAPORE (Reuters) - Oil dropped more than a dollar to near $96 a barrel on Thursday, as the deepening crisis on Wall Street rattled markets, despite a surge of $6 a day ago after a fall in weekly U.S. crude stocks.

U.S. light crude futures for October delivery shed $1.04 to $96.12 a barrel by 0440 GMT (5:40 a.m. BST), after earlier touching an intra-day high of $98.14 a barrel, the strongest since Friday.

Prices, which are nearly 35 percent off their July record high above $147 a barrel, had shot up $6 at Wednesday's close, their largest one-day percentage gain in three months.

London Brent crude lost 109 cents to $93.75 a barrel.

"There is a huge nervousness in the equity sector. Investors are coming back to commodities and this is a flight of safety," said Peter McGuire of Commodity Warrants Australia.

Financial markets the world over continue to be rattled despite the U.S. government's $85 billion bailout of beleaguered American International Group (AIG.N) as investors fret that Wall Street's gyrations had yet to fully play out.

Asian markets, once thought to be able to weather the U.S. credit turmoil, began to show signs of fragility, diving up to 4 percent on Thursday on the back of frenetic consolidation in the U.S. financial sector. The MSCI all-country world stocks index plummeted to its weakest since November 2005.

Overnight, No. 2 U.S. investment bank Morgan Stanley (MS.N) and top U.S. savings and loan Washington Mutual (WM.N) were reportedly up for sale, while Lloyds TSB (LLOY.L) agreed to buy rival HBOS HBOS.L.