UPDATE 3-Oil falls below $40 on grim economic outlook

                                
 * Oil falls after two sessions of gains
                                
 * Israeli offensive goes into fourth day
                                
 * OPEC output set to fall further in December
                                
 
 (Updates prices)
                                
 LONDON, Dec 30 (Reuters) - Oil fell below $40 a barrel on
Tuesday, pressured by gloom about prospects for world economic
growth which outweighed heightened tensions in the Middle East
due to the Israeli-Hamas conflict.
                                
 Prices had jumped as much as 12 percent on Monday after
Israel launched its fiercest air offensive in the Hamas-ruled
Gaza strip in decades. [nLU691622]
                                
 U.S. crude <CLc1> was down 77 cents at $39.25 a barrel by
1151 GMT, having earlier touched a session high of $40.39.
                                
 London Brent <LCOc1> fell 60 cents to $39.95.
                                
 "With most global economies struggling and credit markets
still in an impaired state, it is hard to get too excited about
the upside potential in energy markets attributable solely to
geopolitical factors unless, of course, these are directed at
the heart of the oil supply system," said Edward Meir of futures
broker MF Global.
                                
 Oil is heading for a loss of nearly 60 percent this year,
its biggest annual fall since futures began trading 25 years
ago. It has dropped more than $100 from a record peak above $147
a barrel in July.
                                
 "People are still wary of the global economic problems.
There is still pessimistic news coming out of the States," said
Gerard Rigby, an analyst at Fuel First Consulting in Sydney.
                                
 He said he would also be watching the dollar and stock
markets moves. [USD/][.EU]
                                
 The dollar slipped against the euro and a basket of
currencies, depressed partly by the Israeli offensive, which has
helped to dampen dollar sentiment. [nLU13017]
                                
 The Organization of the Petroleum Exporting Countries has
agreed its biggest-ever production cut of 2.2 million barrels
per day (bpd) to fight the oil market slide.
                                
 The group has cut output three times in an effort to remove
about 5 percent of world supply.
                                
 OPEC oil supply, excluding Iraq and Indonesia, is expected
to fall by 400,000 barrels per day in December as members boost
compliance with their deal to reduce output, consultant
Petrologistics said. [nENG000469]
                                
 The estimate indicates OPEC has more than delivered on its
pledge to lower supply from 11 members to 27.3 million barrels
per day from Nov.1 to prop up prices.
                                
 A poll of analysts forecast that U.S. crude stocks will have
fallen by 1.4 million barrels last week, while distillate
inventories will have risen by 1 million barrels and gasoline
stocks increased by 1.5 million barrels. [EIA/S
                                
 Weekly U.S. fuel inventory data is due on Wednesday.
 (Reporting by Jane Merriman in London and Baizhen Chua in
Singapore, editing by Anthony Barker)