In morning trade, New York's main contract light sweet crude for September delivery tumbled USD 2.33, or 2.68 per cent, to USD 84.55 a barrel, from its closing price on Friday.
Brent North Sea crude for September delivery sank USD 2.91, or 2.66 per cent, to USD 106.46.
"What we do feel is the re-rating of the debt in the US has knocked confidence out of the market," said Jonathan Barratt, Sydney-based managing director with Commodity Broking Services.
"With crude where it is at the moment, that confidence will affect demand or expectations of demand in the market," he told AFP.
The United States, the world's largest oil consumer, saw its top-flight AAA credit rating downgraded for the first time when S&P on Friday cut it to AA+ with a negative outlook on concerns over its debt.
"The announcement was not really a surprise because the S&P had been very clear about what it wanted to see in order for the US to maintain its AAA rating, and the agreement reached last week had not met those criteria," Barclays Capital said in a report.
"To many observers, it was really a question of when it would happen rather than whether it would, though probably few expected it to be quite so soon." The decline in oil prices mirrored the general volatility in global financial markets shaken by the US rating downgrade.
Asian stocks tumbled in early trade today before clawing back some of their losses following frantic weekend efforts to inject calm.