Oil rallies from 3-1/2-year low, tracks stocks

By Edward McAllister

NEW YORK (Reuters) - Oil prices steadied on Friday, after falling more than 7 percent the day before, as stock markets recovered from early lows caused by continuing economic gloom.

U.S. crude fell 13 cents to $49.29 a barrel at 12:08 p.m. EST (1708 GMT), after earlier hitting $48.25, its lowest level in three and a half years. London Brent crude gained 53 cents to $48.61 a barrel.

U.S. stocks recovered slightly after falling into negative territory on Friday as shares of financials, including Citigroup, declined and investors worried about the deepening economic slump.

Slumping demand in the United States and other top oil consuming nations has sent crude prices plunging from record highs above $147 a barrel in mid-July.

On Thursday, oil fell more than 7 percent on gloomy economic data, to settle at its lowest since May 2005.

"Obviously, we are reluctant to call a bottom to this dramatic price decline that is now approaching 4-1/2 months. The attachment between the oil and stock markets will likely remain valid, at least through month's end," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.

JP Morgan said on Friday it expected world oil demand in 2009 to decline by 500,000 barrels per day as the global credit crunch continues to rack the world economy.

Members of the Organization of the Petroleum Exporting Countries will meet in Cairo next week, but may not take any decision to reduce output to defend prices.