Oil prices dropped $10 to below $97 a barrel on Monday after the U.S. House of Representatives rejected the $700 billion rescue package for the financial sector, Reuters reported.
U.S. crude fell $10.00 to $96.89 a barrel by 2:25 p.m. EDT (7:24 p.m. British time), after touching a session low of $96.83, while London Brent crude traded down $9.13 to $94.41 a barrel.
The House voted 228-205 to reject the bailout bill, which would have authorized the Treasury Department to purchase broken mortgage-backed bonds from banks with the goal of jump-starting stalled capital markets.
"The bailout package being defeated sent stock markets tumbling, weighing on petroleum as well," said Tom Bentz, analyst at BNP Paribas Commodity Futures.
U.S. stocks extended lows following the vote. World markets already had tumbled as U.S. regional bank Wachovia succumbed to the credit crisis and authorities stepped in to rescue three European banks, the latest casualties of spreading credit strife.
The mounting economic crisis has stirred concerns about oil demand, helping drag prices from a record high above $147 a barrel in July.
"The spread of credit problems to European banks and slumping consumer business and consumer confidence there is raising concerns that demand for crude and refined products will begin to drop off, as it has in the U.S.," Addision Armstrong, analyst at Tradition Energy, said in a note.
Traders also were watching the slow recovery of U.S. oil infrastructure following after Hurricane Ike hit the U.S. Gulf of Mexico.
Iran, the world's No. 4 oil exporter, avoided new sanctions in a United Nations vote over the weekend.
The U.N. Security Council unanimously passed a resolution on Saturday that again ordered Iran to halt its nuclear enrichment work, but it imposed none of the new sanctions Washington and its allies wanted.
Political tension over Iran's nuclear program was one factor that helped drive oil higher this year.