Oil fell more than 2.5 percent to below $69 a barrel Tuesday as risk-averse investors fled from commodity markets, spooked by fears that interest rates would rise to combat inflation.

Prices of industrial and precious metals also fell sharply and equity markets dropped. A flow of money from investment funds has helped send oil and some other commodities to record or decades highs in 2006.

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"The broader market concern is about growth and inflation," said Craig Pennington, global energy portfolio manager at Schroders. "From the oil market's perspective, the concerns are that if you see slower economic growth you'll see slower oil demand."

U.S. crude for July settled down $1.80 at $68.56 a barrel after trading as low as $68.30. London Brent crude lost $2.01 to $66.92 a barrel.

Oil also slipped on expectations U.S. gasoline inventories rose for a seventh week and as the season's first Atlantic storm, Tropical Storm Alberto, weakened along a route that will miss U.S. energy installations.

"It was clear yesterday morning that Alberto was not going to hit the installations in the U.S. Gulf," said Deborah White, analyst at Societe Generale. "It just became a reminder that the hurricane season is back."

Qatar's Oil Minister Abdullah al-Attiyah said crude supplies were plentiful and blamed recent high prices -- which hit a record over $75 a barrel for U.S. crude in April -- on a shortage of refining capacity.

"There is no shortage of supply," al-Attiyah said at an event hosted by the U.S. Chamber of Commerce in Washington. He added that oil prices of $50 to $55 a barrel would be ideal for the OPEC producer cartel.

IEA ON DEMAND

Oil in New York, which hit a record of $75.35 in April, is still up 13 percent this year. Tension over Iran's atomic work, violence in Iraq and growing world demand have boosted prices.

A monthly report from the International Energy Agency on Tuesday said a robust world economy is underpinning oil demand growth, but high prices are slowing consumption in the U.S.

"Strong economic growth is an important counterbalance, but on the whole we're seeing evidence of high price effects coming through," said Lawrence Eagles, head of the IEA's oil industry and markets division.

The adviser to 26 industrialized countries cut 2006 global oil demand growth by just 10,000 barrels per day to 1.24 million bpd, and traders said the report could be seen as supportive.

"The IEA report this morning was neutral to slightly bullish," said Rob Laughlin, a broker at Man Financial.

A rise in U.S. fuel inventories in recent weeks has helped counter the impact on oil prices of tension over Iran's nuclear work and supply losses in Nigeria, where attacks by militants have shut down about a quarter of the country's output.

U.S. gasoline inventories stood about 2.4 percent below year-ago levels a week ago but are expected to have risen by 1.4 million barrels in the week to June 9, a seventh consecutive build, a preliminary Reuters poll shows. EIA/S]

Crude stocks were seen rising by 400,000 barrels and distillate inventories climbing 1.6 million barrels. U.S. government stock data is due out on Wednesday.

Iran's signals on a Western offer to defuse the stand-off over its nuclear program have whipsawed oil markets. Tehran first sounded a positive note on the incentives last week but later cited some problems.

Pressure to give a clear reply to the offer mounts this week as the 35-nation board of the International Atomic Energy Agency (IAEA) meets in Vienna.

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