Prospects that US President Barack Obama would push through a tax cut extension deal helped limit the day's losses because more money in consumer pockets could boost energy demand. The energy complex also drew support as wintry weather hit the United States early, analysts said.

US crude for January delivery fell 43 cents to $88.26 a barrel at 12:35 p.m. EST (1735 GMT), well off Tuesday's session high of $90.76, the highest since October, 2008. In London, ICE January Brent dropped 49 cents to $90.90 a barrel.

US gasoline stockpiles rose by a more-than-expected 3.8 million barrels last week, the Energy Information Administration's inventory data showed.

Stocks of distillates, which include heating oil and diesel fuel, rose by 2.2 million barrels, dashing forecasts for a modest drawdown.

The fuel stocks increase overshadowed a larger-than-expected drawdown of 3.8 million barrels in crude inventories on the heels of a surprisingly big jump in refinery utilization.

The industry group American Petroleum reported late on Tuesday that domestic crude stocks jumped 7.3 million barrels last week. Distillate stocks rose 1.7 million barrels while gasoline supplies surged 4.8 million barrels, it said.

The dollar rose about 0.4 percent against a basket of currencies as US Treasury yields spiked in reaction to the likelihood of the tax cut plan going forward. This developed as currency traders put euro zone debt concerns on the back burner, focusing instead on US economic prospects.

Recent US economic data on retail sales and growth in the service sector signaled that the recovery was taking hold, although last week's data showing a jump to 9.8 percent in the unemployment rate has tempered the growth outlook.

A stronger dollar tends to weigh on the price of oil and other dollar-denominated commodities.

Oil's downward trend could persist if China proceeded with a speculated rise in interest rates to cool down its overheated economic growth.

Gold tumbled a day after hitting a lifetime high, setting the stage for its biggest one-day drop in a month, in a burst of profit-taking spurred partly by the stronger dollar.

On Wall Street, investors retreated from stocks, with the major US indexes little changed, in reaction to the dollar's strength and the spike in bond yields.

In Europe, stocks closed at a 26-month high, lifted by banking and insurance shares, on expectations that worries about the euro-zone debt crisis will ease.

At midday in New York, the Dow Jones Industrial Average was down 2.50 points, or 0.02 percent, at 11,356.66. But the Standard & Poor's 500 Index was up 1.56 points, or 0.13 percent, at 1,225.31. And the Nasdaq Composite Index was up 5.83 points, or 0.22 percent, at 2,604.33.

The pan-European FTSEurofirst 300 index of top shares rose to a fresh 26-month closing high at 1,119.51 points, up 0.35 percent, as financial stocks in Europe advanced.

Global stocks measured by the MSCI All-Country World Index fell 0.36 percent.

Spot gold prices fell $25.84, or 1.84 percent, to $1,375.50 an ounce