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Oil prices fell below $78 a barrel Wednesday after U.S. crude supplies unexpectedly rose, suggesting demand in the world's largest economy remains weak.

By early afternoon in Europe, benchmark crude for January delivery was down 68 cents to $77.69 in electronic trading on the New York Mercantile Exchange. The contract rose $1.09 to settle at $78.37 on Monday.

U.S. crude inventories unexpectedly fell last week, the American Petroleum Institute said late Tuesday. Crude stocks rose 2.9 million barrels while analysts had expected a drop of 1.3 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

"The API report suggests that there are still surprisingly high levels of U.S. inventories," said analysts at Sucden Research in London. "This, along with a forecast of mild temperatures in the U.S. for December, could push crude oil prices in a correction lower."

The Energy Information Administration plans to announce its inventory report - the market benchmark - later Wednesday.

Oil prices broke below $76 a barrel late last week after conglomerate Dubai World said it would delay interest payments on $60 billion of debt. But prices quickly recovered this week as investors were encouraged by signs of improving crude demand in Asia.

Crude has traded between $75 a barrel and $82 for more than a month.

"Prices should continue to be rangebound," Societe Generale said in a report. "However, there is a solid floor."

In other Nymex trading in contracts for January delivery, natural gas shed 7.6 cents to $4.686 per 1,000 cubic feet, heating oil fell 1.48 cents to $2.0632 and gasoline lost 2.18 cents to settle at $2.0205.

In London, Brent crude for January delivery fell 52 cents to $78.83 on the ICE Futures exchange.

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Associated Press writer Alex Kennedy in Singapore contributed to this report.

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