NEW YORK (Reuters) - Oil prices tumbled on Monday on worries of a crude glut, putting pressure on energy shares and giving pause to global equity prices, which have rallied to their highest in nearly a year.
The U.S. dollar recovered some ground against a basket of major currencies after its worst week in three months.
A near 15-percent slump in U.S. crude prices in July, the worst monthly loss in a year, triggered liquidation as trading began for August and U.S. crude fell below $40 per barrel for the first time since April.
"It's stop-loss technical selling combined with sheer liquidation by those fearing we'll soon be swimming in oil again," said Phil Davis, trader at PSW Investments in San Diego, California.
Brent crude LCOc1 settled down $1.39, or 3.19 percent, at $42.14 a barrel, while U.S. crude CLc1 settled down $1.54, or 3.70 percent, at $40.06.
Energy shares were hit hard and global equity prices pulled back a little after rising to the highest in nearly a year. MSCI's world stocks index .MIWD00000PUS, which tracks shares in 45 nations, was down 0.11 percent.
The S&P, which has been on a record-setting rally, hit an intraday all-time high earlier in the session.
"Oil has once again re-emerged as a real driver of how investors are gauging the trend for equities," said Peter Kenny, senior market strategist at Global Markets Advisory Group in New York.
The S&P 500 index has remained in a tight range over the past 13 sessions.
"The economic data until last week had been pretty decent. But since the (U.S.) GDP numbers came out, we're seeing holes in the argument that the second half of the year is going to be better," said Art Hogan, chief market strategist at Wunderlich Securities in New York.
"At these valuations, the market is desperate for a catalyst to move higher."
Growth in U.S. gross domestic product in the second quarter came in below expectations on Friday, fueling speculation that the Federal Reserve may not pull the trigger on raising interest rates anytime soon.
Data on Monday showed U.S. manufacturing activity slowed in July as orders fell broadly and construction spending dropped in June.
The Dow Jones industrial average .DJI closed down 27.73 points, or 0.15 percent, at 18,404.51, the S&P 500 .SPX shed 2.76 points, or 0.13 percent, to finish at 2,170.84 and the Nasdaq Composite .IXIC added 22.07 points, or 0.43 percent, to end at 5,184.20.
Europe's broad FTSEurofirst 300 index .FTEU3 closed down 0.61 percent at 1,339.15. Stocks were dragged down by banks such as UniCredit and Raiffeisen, which performed poorly in a Europe-wide stress tests.
In currency trading, the dollar index .DXY rebounded, helped by gains against the yen, which pulled back from Friday's three-week highs after the Bank of Japan eased policy less aggressively than expected.
The dollar index, which tracks the greenback against six major currencies, was up 0.23 percent to 95.746.
In bond markets, U.S. Treasury yields rose from Friday's multi-week lows as Microsoft Corp (MSFT.O) launched the fifth largest corporate bond offering of all time, drawing appetite away from safe-haven U.S. government debt, and on profit-taking.
Benchmark U.S. 10-year Treasuries prices US10YT=RR were down 15/32 to yield 1.5094 percent, after touching a more than two-week low in yield of 1.450 percent Friday.
Spot gold prices XAU= were up 0.26 percent to $1,354.10 an ounce.
Additional reporting by Tanya Agrawal in Bengaluru; Editing by Meredith Mazzilli and Dan Grebler