In New York benchmark West Texas Intermediate crude for March delivery dropped by $1.60 to finish at $96.17 a barrel. Oil prices had risen steadily since they traded near $86 a barrel in mid-December on hopes for an improving global economy.
When economies grow, shippers and travellers use more gasoline and diesel, pushing up demand for oil use to make the fuels.
Brent crude, the benchmark used to set prices for oil imported by many U.S. refineries, was down $1.16 to end at US$115.60 in London.
For much of the past two years, tensions in the Middle East have helped keep oil prices high by crimping supplies and raising fears that supplies could be cut even further.
Western countries have taken steps to stem the flow of crude out of Iran to try to convince the country to stop what the West says is a program to develop a nuclear weapon. In response Iran, which insists its nuclear program is for peaceful purposes only, has threatened to disrupt the flow of oil through the Middle East.
On Saturday, while on a visit in Germany, U.S. Vice-President Joe Biden said Washington was ready for direct talks with Iran over its nuclear program. The Iranian foreign minister on Sunday welcomed Biden's gesture but did not commit to taking up the offer.
Negotiations between Iran and the five permanent members of the UN Security Council plus Germany have made little progress and analysts welcomed the possibility of direct talks.
"It seems that small steps in that direction have started," said Olivier Jakob of Petromatrix in Switzerland. "The U.S. had its election, Israel had its election but Iran still needs to go through its elections in June and that could still be a delay in the formal process but already a small change of dynamics will be important."
If Iranian oil that is now embargoed can return to the market, supplies will rise and prices could fall.
In other energy futures trading on the New York Mercantile Exchange, wholesale gasoline fell four cents to finish at US$3.01 a U.S. gallon (3.79 litres), heating oil lost less than one cent to finish at US$3.15 a gallon and natural gas rose one cent to end at US$3.32 per 1,000 cubic feet.