LONDON - Oil fell below $40 a barrel on Tuesday, pressured by gloom about prospects for world economic growth that outweighed heightened tensions in the Middle East.

Prices had jumped as much as 12 percent on Monday after Israel launched its fiercest air offensive in Gaza Strip in decades.

U.S. crude was down 54 cents at $39.48 a barrel, having earlier touched a session high of $40.39. London Brent fell 57 cents to $39.98.

"With most global economies struggling and credit markets still in an impaired state, it is hard to get too excited about the upside potential in energy markets attributable solely to geopolitical factors unless, of course, these are directed at the heart of the oil supply system," said Edward Meir of futures broker MF Global.

Oil was heading for a loss of nearly 60 percent in 2008, its biggest annual fall since futures began trading 25 years ago. It has dropped more than $100 from above $147 a barrel in July.

"People are still wary of the global economic problems. There is still pessimistic news coming out of the States," said Gerard Rigby, an analyst at Fuel First Consulting in Sydney.

The dollar slipped against the euro and a basket of currencies, depressed partly by the Israeli offensive, which has helped to dampen dollar sentiment.

The Organization of the Petroleum Exporting Countries has agreed its biggest-ever production cut of 2.2 million barrels per day.