In its monthly report on the oil markets, the Paris-based agency said global oil demand this year will reach 86.6 million barrels a day, up from its forecast last month of 86.5 million barrels.

The agency warned, however, that the short-term economic outlook "is highly uncertain" and that significant risks to oil demand growth remain.

The IEA, the energy arm of the Organization for Economic Cooperation and Development, a grouping of the world's richest nations, also raised its oil demand forecast for 2011. The agency expects global oil demand next year to rise 1.5 percent to 87.9 million barrels a day, up from its forecast last month of 87.8 million barrels.

OECD member states' oil demand is now forecast to show slight growth of 0.2 percent this year, compared to the IEA's forecast last month of a small drop. The agency said the increase was based on "slightly higher readings in Europe" and a "reappraisal of US demand prospects." Non-OECD states' oil demand is forecast to increase 4.5 percent this year and 3.7 percent in 2011. Growth is being driven by higher economic assumptions and stronger than expected readings in Asia and the former Soviet Union, the IEA said.

Oil prices fell below $80 a barrel Wednesday as signs of slowing growth in China, a cautious statement from the Federal Reserve and falling stock markets undermined expectations that demand will strengthen.

By early afternoon in Europe, benchmark crude for September delivery was down 78 cents to $79.47 a barrel in electronic trading on the New York Mercantile Exchange. The contract lost $1.23 to settle at $80.25 on Tuesday. In London, Brent crude was down 69 cents at $78.91 a barrel on the ICE Futures exchange.

The euro was down to $1.3004 on Wednesday from $1.3196 late Tuesday in New York.

World markets tumbled Wednesday. In Europe, the FTSE 100 index of leading British shares closed down 131.20 points, or 2.4 percent, to 5,245.21 while Germany's DAX fell 132.18 points, or 2.1 percent, to 6,154.07. The CAC-40 in France ended 102.29 points, or 2.7 percent, lower at 3,628.29.

In New York,  the Dow Jones Industrial Average was down 224.32 points, or 2.1 percent, at 10,419.33 around midday New York time while the broader Standard and amp; Poor's 500 index slid 27.75 points, or 2.5 percent, to 1,093.31.

Earlier, the strength of the yen hit Japanese shares hard and the Nikkei 225 stock average closed down 258.20 points, or 2.7 percent, at 9,292.85.

Elsewhere, South Korea's Kospi lost 1.3 percent to 1,758.19, Australia's S and P/ASX 200 dropped 1.9 percent to 4,455.50 and Hong Kong's Hang Seng shed 0.8 percent to 21,294.54.