Oil prices extended their sharp fall to drop further below $40 a barrel on Tuesday, weakened anew by growing signs of deteriorating world oil demand.

Final third-quarter US gross domestic product data due later in the day is likely to underscore the ailing state of the world economy as a steady series of stimulus measures and policy moves -- including China's fifth interest rate cut -- fail to halt a slide towards the worst recession in decades.

US crude for February delivery fell 49 cents to $39.42 a barrel after diving 6 per cent on Monday, with volume particularly thin as traders seek to close out the worst-ever year for oil futures, which are now down 57 per cent from January.

ICE Brent fell 42 cents to $41.03 a barrel.

Deepening losses for US stocks and the most dramatic decline ever in Japanese exports heightened anxiety on Monday about the condition of the world economy; signs that oil demand is likely to contract for the first time in a quarter century has already knocked oil prices over $100 off their July peaks.

The Organization of the Petroleum Exporting Countries (OPEC) has rushed to cut about 5 per cent of world supplies to counter the collapse in demand, last week agreeing an unprecedented 2.2 million barrels per day.

A senior OPEC delegate said the group was ready to reduce supply further if needed, but oil traders have said they are most concerned for now with seeing evidence of improved compliance with the existing curbs.

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