New York - Brent crude oil fell towards $109 a barrel on Monday as stock markets tumbled and the dollar strengthened after an unusual bank bailout proposal for Cyprus threatened to trigger fresh economic turmoil in the euro zone.

A proposal for debt-laden Cyprus to tax depositors as part of a bailout plan for the country sparked fears of a run on some banks in the region. Concern over fallout helped weaken the euro and other riskier assets such as Asian shares and base metals.

The US dollar gained 0.4 percent against a basket of foreign currencies. A firming dollar can weaken oil prices, making them more expensive for holders of other currencies.

However, recently positive economic data from the world's top oil consumer the United States and worries over supply disruption helped stem larger losses in Brent. US crude futures turned positive in afternoon trading.

Brent futures fell 47 cents to $109.35 per barrel by 1.38pm in New York (17h38 GMT), after dipping below $108 a barrel earlier in the day. US oil reversed earlier losses to trade up three cents a barrel at $93.48.

“The bailout conditions for Cyprus, specifically the unprecedented removal of funds from depositors' accounts, is sending share and commodity prices lower,” said Tamas Varga, oil analyst at oil brokers PVM Oil Associates in London.

“This step is causing shivers throughout the financial world, and it has created the fear that a reaction in other peripheral eurozone countries could hit the whole banking sector in Europe,” Varga added.

Oil markets will remain volatile for the next few days as investors watch for any spillover of the developments in Cyprus to other EU nations, analysts said.

Cypriot ministers were trying on Monday to revise a plan to seize money from bank deposits before a parliamentary vote on Tuesday that will secure the island's financial rescue or could lead to its default, with reverberations across the euro zone.

The uncertainty surrounding the proposed bailout drove investors to the safety of gold, which rose above $1 600 an ounce for the first time in more than two weeks.

Technical signals are mixed for Brent as it is not clear that a rebound from the March 13 low has completed, Reuters technical analyst Wang Tao said. US oil may drop to $91 as it failed to break resistance at $93.72 for the second time.

Further losses in oil were capped by expectations of a steady revival in demand growth from the United States, and comments from Saudi Arabia's top energy official that oil prices near current levels won't hurt the economy.

Almost all US states began 2013 with lower unemployment rates than they had at the start of 2012, according to Labour Department data.

Current oil prices will have no impact on growth in Asia, the oil minister for top exporter Saudi Arabia, Ali al-Naimi, said in Hong Kong. The region's biggest economies, including China, have struggled with rising energy costs in their efforts to boost growth.

Worries of an escalation in a standoff between the West and Iran over Tehran's disputed nuclear programme could also help ensure prices do not fall much further. Concerns of supply disruption from the Middle East have kept Brent above $100 a barrel through most of 2012 and this year. - Reuters