Oil plunges on strong dollar, profit taking

New York's main contract, light sweet crude for February delivery, known as West Texas Intermediate (WTI), sank $1.98 to $99.36 a barrel.

Brent North Sea crude for February dived $1.71 to $107.56 in volatile late afternoon London trade, ahead of the New Year holiday break.

"The reversal of the euro breaking down below $1.30, a key level, pressured oil, said John Kilduff of Again Capital.

The European single currency tumbled as investors fretted over the eurozone crisis on the eve of Italy's second bond auction within just two days.

In late Wednesday deals, the euro slumped to $1.2941, the lowest point since January 11. It later pulled back slightly.

The stronger greenback makes dollar-denominated crude more expensive for weaker currencies, like the euro, and this tends to dampen oil demand and prices.

The oil market also pulled lower as many traders opted to cash in recent gains sparked by heightened tensions with Iran.

Crude futures had rallied on Tuesday after Tehran warned that it could try to close the vital Strait of Hormuz, which links the petroleum-rich Gulf with the Arabian Sea, in response to further Western sanctions.

However, those concerns have since eased.

"Shutting down the strait... is the last bullet that Iran has and therefore we have to express some doubt that they would do this and at the same time lose their support from China and Russia," said Petromatrix analyst Olivier Jakob.

The United States warned Iran on Wednesday against any attempt to disrupt shipping.

"Interference with the transit... of vessels through the Strait of Hormuz will not be tolerated," said Pentagon press secretary George Little, adding that there had been no sign of hostile action by Iran in the area.