* Oil falls more than $6.50 to below $109 a barrel
* Gustav fears ease as refinery, field damage seen limited
* IEA says no need to release oil stocks
(Updates with details, changes dateline from LONDON)
NEW YORK, Sept 2 (Reuters) - Oil prices dropped more than $6.50 per barrel on Tuesday, the biggest drop in dollar terms since 1991, as dealers bet the U.S. oil industry would recovery quickly from Hurricane Gustav.
The easing fears that the storm would mirror Hurricanes Katrina and Rita in 2005, which caused a prolonged disruption to energy supplies in the world's biggest consumer, allowed the market to refocus on weak bearish factors like slowing world energy demand, rising stockpiles and a rising U.S. dollar.
"It would take a really major storm to change the direction in crude oil in the midst of its major correction since July, and Gustav is not it," said Chris Jarvis, senior analyst at Caprock Risk Management in Hampton Falls, New Hampshire."
U.S. crude <CLc1> fell $6.60 to $108.86 a barrel by 1630 GMT, bringing prices down nearly $40 from the peak in mid-July amid accumulating concerns over slowing global energy demand. London Brent <LCOc1> fell $1.70 to $107.71.
The drop in U.S. oil prices on Tuesday, calculated against last Friday's settlement due to the U.S. holiday on Monday, was the biggest in dollar terms since the start of the first Gulf War in 1991 and the biggest in percentage terms since 2004.
"If it were not for these (storm) threats, we would have been testing $100 already," said Mike Wittner, energy analyst at Societe Generale.
Oil and other commodities have been in a tailspin since mid-July that analysts said has been fueled by softening world energy demand and a rebound in the dollar, which weakens the purchasing power of buyers using other currencies.
Oil traders had initially expected Gustav, the first big threat to U.S. energy supply since 2005, would stem oil's decline by interrupting supplies.
Virtually all energy production in the Gulf of Mexico, which accounts for a quarter of the nation's oil output, and about a third of U.S. oil refining capacity was either shut or slowed down in the wake of the storm.
But early indications revealed no major damage -- a signal that production could rebound quickly.
The International Energy Agency (IEA) said on Tuesday there was no need to release strategic oil stocks after Hurricane Gustav as damages appeared limited. []
U.S. President George W. Bush said despite the early indications, the full impact of Gustav was still unclear.
"It's a little early right now to come up with a solid assessment," he said. "There are some encouraging signs." (Additional reporting by Barbara Lewis in London and Chua Baizhen in Singapore; editing by Marguerita Choy)
