UPDATE 7-Oil drops 3 percent on financial market turmoil

                                
 * Oil dives to seven-month low on Lehman, banking turmoil
                                
 * Minor damage seen from Hurricane Ike
                                
 * Markets await U.S. Federal Reserve rate decision
                                

                                
 (Updates prices)
                                
 By Santosh Menon
                                
 LONDON, Sept 16 (Reuters) - Oil fell 3 percent on Tuesday on
rising concern that turmoil in global financial markets will
further undermine fuel demand and send investors into safer
havens.
 Reports that U.S. oil infrastructure had escaped major
damage from Hurricane Ike also weighed on markets, which fell
more than $5 on Monday after Lehman Brothers <LEH.N> sought 
bankruptcy protection. [nN15183745]
                                
 U.S. crude <CLc1> for October traded down $2.66 to $93.05 a
barrel by 1501 GMT, off a seven-month low of $90.55 a barrel
earlier in the session.
                                
 November Brent crude <LCOc1> fell $2.97 to $91.27 a barrel.
                                
 "If the economic turmoil continues, demand will continue to
drop," said Jonathan Kornafel, Asia Director at U.S.-based
options trader Hudson Capital Energy. "It's a bit of panic in
the markets."
                                
 Slowing demand in the United States and other top consumer
nations has sent crude prices tumbling from record highs over
$147 a barrel in July.
                                
 "We have gotten into what appears to be the final stages of
liquidations by long investors that thought they were buying for
an up move that was going to last for a number of years," Peter
Beutel, president of Cameron Hanover in New Canaan, Connecticut.
                                
 Monday marked the worst day on Wall Street since markets
reopened after the Sept. 11 attacks, with investors fleeing to
safer havens such as gold after the news on Lehman and the sale
of Merrill Lynch <MER.N>. 
                                
 Growing problems at insurer American International Group
<AIG.N> added to fears about the financial sector's stability
and the outlook for the global economy.
                                
 "If AIG tanks, that will be the big one. AIG has more to do
with the oil price right now than the Saudis do," said Larry
Grace, an analyst at Kim Eng Securities in Hong Kong.
                                
 European shares fell on Tuesday amid concerns over AIG,
driving up the yen and government bonds.
                                
 Federal Reserve policy-makers are expected to stop short of
lowering U.S. interest rates at a meeting on Tuesday but could
signal readiness to cut them quickly if needed to protect the
economy from one of the most serious financial crises in decades.
[nN15285738]
                                
 IKE REBOUND
                                
 Further pressure on prices came on expectations a large part
of U.S. energy production shut by Hurricane Ike would restart
within a week as reports showed the storm caused only minor
damage to oil platforms and refineries. [nN15281950]
                                
 Fuel supply disruptions are still possible in the meantime,
as the shutdowns cut already threadbare gasoline inventories to
their lowest levels on record, sending pump prices spiking.
                                
 The oil price fell despite renewed concern about supply in
Nigeria, where militants attacked a Royal Dutch Shell <RDSa.L>
oil pipeline and Chevron-operated <CVX.N> oilfield, militants
and security sources said on Tuesday.
 (Reporting by Alex Lawler, Santosh Menon and Matthew Robinson
in London; Tom Miles in Hong Kong and Annika Breidthardt in
Singapore, editing by Anthony Barker)