Oil prices shed nearly $4 US yesterday, tumbling below $125 a barrel for the first time since early June on growing fears high prices and the weak economy are destroying demand.

Light, sweet crude for September delivery dropped $3.98 to settle at $124.44 a barrel on the New York Mercantile Exchange. The August contract expired Tuesday at $127.95.

A weekly report by the U.S. Energy Department's energy information administration offered further evidence that cash-strapped Americans are cutting back on fuel.

Demand for gasoline over the four weeks ended July 18 was 2.4 per cent lower than a year earlier, averaging more than 9.3 million barrels a day.

The drop in gas demand was echoed in a report from the U.S. Federal Reserve on regional economic conditions that showed the country mired in sluggish economic growth and rising prices.

The Energy Department report showed that gasoline stockpiles jumped by 2.9 million barrels last week.