Oil prices dropped to their lowest in more than two months on Tuesday as the handover of power to Iraq's interim government raised hopes for less sabotage and steadier exports, reinforcing indications of healthier world supply.

U.S. light crude lost 23 cents to $36.01 a barrel on the New York Mercantile Exchange (search), after bouncing off an intra-day low of $35.65, the lowest price seen since April 21. The contract fell $1.31 on Monday.

London's Brent crude (search ) was 12 cents lower at $33.58 a barrel.

U.S. light crude has lost more than $6 per barrel from a record high of $42.45 reached on June 2, as increased OPEC production helps rebuild U.S. inventories and encourages speculators to bail out of the market.

Monday's earlier-than-expected handover of Iraqi sovereignty strengthened selling. Traders had feared renewed attacks on Iraqi oil facilities ahead of the planned June 30 transfer of power.

"The early handover is reducing fears of terrorist disruptions to oil supplies -- fears that had added at least several dollars to prices," said David Thurtell, commodity strategist with Commonwealth Bank of Australia.

Monday's crude losses were led by gasoline futures, which dropped about five percent to $1.1448 a gallon.

A 23 percent fall in U.S. gasoline prices since mid-May has helped pull crude down from the $40 level as fears for summer supply shortages diminish.

"The fact that fundamentals are softening and prices heading down comes as no surprise," said analysts at PFC Energy.

Chinese efforts to slow economic growth, reduced fears over the security of Middle Eastern supplies, and higher OPEC output, were driving the price downturn, PFC said.

The Organization of the Petroleum Exporting Countries (search) agreed earlier in June, when New York futures prices were at record highs, to raise its formal output limits by two million bpd from July 1. It also agreed to lift curbs by another 500,000 bpd from August 1.

Prices could quickly go back up again in the event of a major attack on oil facilities, analysts said.

"If the situation in Iraq does worsen substantially, exports could be curtailed far more than has occurred to date and prices could spike over $40 again," the PFC Energy report said.

The latest weekly inventory snapshot from the U.S. government was expected to show tighter gasoline supplies, but a build on crude.

A Reuters poll of seven analysts, ahead of the release of the Energy Information Administration (search) data on Wednesday, forecast an average drop of 800,000 barrels in gasoline stocks in the week to June 25.

Commercial crude stocks were expected to show a two-million-barrel build, which would extend an uptrend to 18 of the past 22 weeks.