Brent North Sea crude for delivery in November dipped 38 cents to stand at $107.78 a barrel in London midday deals.
New York's main contract, West Texas Intermediate for November sank to $103 -- the lowest point since August 8. It later stood at $103.16 a barrel, down 43 cents from Monday's closing level.
Traders welcomed news of easing tensions surrounding Iran, which is a major oil producer in the Organization of Petroleum Exporting Countries (OPEC).
In a diplomatic breakthrough, the foreign ministers of arch rivals, the United States and Iran, will hold their first talks on Tehran's contested nuclear drive at a landmark meeting on Thursday.
Secretary of State John Kerry and new Iranian Foreign Minister Mohammad Javad Zarif will join counterparts from Britain, China, France, Germany and Russia at the meeting at United Nations headquarters.
"Oil prices have continued to fall ... as Middle Eastern tensions ease back," said analyst Gary Hornby at British-based energy consultancy Inenco.
"Brent Crude prices are below $108 per barrel as Iran and the US are set for talks at the end of this week over Tehran's disputed nuclear programme, with the Iranian President desperate for economic sanctions against the country to be lifted."
High-level contacts between Iranian and US officials have been rare since the 1979 Islamic Revolution. But in another sign of a possible thaw, the White House said it was not ruling out a meeting between President Barack Obama and new Iranian counterpart Hassan Rowhani on the sidelines of this week's UN General Assembly.
Sanctions imposed on Iran by Western powers for its alleged efforts to build a nuclear bomb have caused its oil exports to fall by more than half, to below one million barrels per day.
Tehran insists its nuclear programme is for peaceful purposes.
The oil market retreated on Tuesday also following news of recovering output in Iraq and Libya.
Officials from Iraq, the second largest producer in oil cartel OPEC, were Monday quoted as saying that the country had restored normal output after completing repair work on a pipeline leak.
"Oil production continues to recover from Libya and Iraq has boosted oil output from the Rumaila field after repairing a leaking pipeline," added Hornby.
"This bearish sentiment overshadowed positive flash PMI data from China and the eurozone which capped losses."
HSBC said Monday its preliminary purchasing managers' index of Chinese manufacturing in September hit a six-month high of 51.2, while a PMI of business activity in the 17-nation eurozone hit a 27-month high of 52.1.
A reading above 50 indicates growth, while anything below signals contraction.