Oil falls to $65 as U.S. economy shrinks

NEW YORK (Reuters) - Oil fell nearly $3 to below $65 a barrel on Thursday as weak U.S. economic data rekindled worries about declining energy demand.

The U.S. economy shrank at an 0.3 percent annual rate in the third quarter, the sharpest contraction in the world's largest economy for seven years. Businesses cut investment and consumers slashed spending at rates not seen for 28 years.

"The GDP numbers made traders rethink whether the economy was going to be strong enough to support oil demand," said Phil Flynn, analyst at Alaron Trading.

U.S. crude was down $2.43 at $65.07 a barrel at 1:00 p.m. EDT. London Brent crude was down by $2.60 at $62.87.

Oil has more than halved its record high of $147.27 from July and is down 30 percent in October, on track for its biggest ever monthly fall.

In early trade, oil rose to $70.60, supported by a weak dollar and hopes that interest rate cuts in the United States and China would bolster the world economy.

The U.S. Federal Reserve cut interest rates by half a percentage point on Wednesday, taking its target for overnight bank lending to 1 percent, the lowest since 2004, in an attempt to revive the sagging economy.

China also cut interest rates on Wednesday, kicking off what is expected to be a global round of rate cuts. Norway, Taiwan and Hong Kong have also cut rates.

The Fed cut pushed the dollar lower on Wednesday, making dollar-priced commodities like oil cheaper and more attractive for holders of other currencies. But the dollar rose on Thursday amid month-end book squaring by investors.

Oil drew some support from OPEC's decision last week to cut output by 1.5 million barrels per day, or about 5 percent, to prop up prices and hints that it might further reduce supply.

Nigeria's state oil company said in a statement it would reduce crude oil export volumes by 5 percent in November and December because of the OPEC cutback.

(Additional reporting by Alex Lawler in London; editing by Karen Foster/James Jukwey; Editing by David Gregorio)