NEW YORK (AP) -- Oil prices fell Wednesday, touching their lowest level this year -- as the government reported a huge spike in crude inventories while giving more evidence of dwindling demand.

Light, sweet crude for November delivery was down $1.23 at $88.83 in afternoon trading on the New York Mercantile Exchange, paring earlier losses after the stock market rose into positive territory after being down most of the day.

Oil prices earlier fell to $86.05, the lowest level since Dec. 6, 2007.

Crude has now fallen about 40 percent since surging to an all-time record $147.27 a barrel on July 11.

But Wednesday's losses were limited by growing speculation that the Organization of the Petroleum Exporting Countries could cut output to keep prices from falling too hard. OPEC officials, worried about declining oil revenue, in recent days have urged members of the cartel not to pump too much crude in a bid to keep prices above $100.

"As prices move toward $80, you'll see at the very least some quiet cuts from OPEC members," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Mass. "If the market really looks like it's going to remain weak, you'll see an official OPEC notice" to cut supplies.

Analysts are split over how an OPEC output cut would impact oil prices. Some believe it could put a floor under falling prices by tightening world supplies, while others believe a deteriorating global economy will keep demand and therefore prices low.

OPEC's decision last month to cut production by 520,000 barrels failed to halt oil's slide. The 13-member body is next scheduled to meet Dec. 17 in Algeria.

"OPEC has always been better at propping up the market when supplies are tight. They have a difficult time supporting prices when global demand is declining sharply, and that's the situation we're currently in," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.

Crude's losses Wednesday came as U.S. energy supplies swelled, reflecting both persistently weak demand and a recovery of Gulf Coast energy output following shutdowns prompted by Hurricane Ike last month.

U.S. crude inventories jumped by 8.1 million barrels last week while gasoline stocks surged 7.2 million barrels, the Energy Information Administration said in its weekly inventory report. Both increases far exceeded expectations. Analysts surveyed by energy research firm Platts had expected a 1 million barrel drop in crude supplies and a 2 million barrel build in gasoline stocks.

Meanwhile, demand for gasoline over the four weeks ended Oct. 3 was 5.3 percent lower than a year earlier, averaging nearly 8.8 million barrels a day, according to the EIA report.

Oil market traders bid down the price for oil on the news, seeing the excess supplies as another sign that U.S. consumers and business are cutting back on energy use.

"There is still a lot of demand concerns in the global economy and that's going to continue translating into a struggling energy market," said Tom Bentz, analyst at BNP Paribas Commodity Futures in New York.

The drop in demand is weighing heavily on gasoline prices. Gasoline futures fell to a one-year low of $1.95 a gallon on the Nymex before paring some of this losses to trade 4.3 cents lower at $2.0198 a gallon.

Meanwhile at the pump, a gallon of regular fell about 3 cents overnight to a new national average of $3.447 a gallon Wednesday, but remain well above the year-ago average of $2.765 a gallon, according to auto club AAA, the Oil Price Information Service and Wright Express.

Oil prices came off their lows earlier in the day after the Federal Reserve and other central banks around the globe cut their key interest rates by half a percentage point in the latest emergency measure to stave off a world economic meltdown.

The move came after a $700 billion U.S. financial bailout plan approved last Friday failed to soothe investors worried about a deepening economic malaise.

In its weekly report, the EIA said inventories of distillate fuel, which include diesel and heating oil, fell 500,000 barrels to 122.6 million barrels for the week ended Oct. 3. Analysts expected distillate stocks to rise by 1 million barrels.

At the same time, U.S. refineries ran at 80.9 percent of total capacity on average, a gain of 8.6 percentage points from the prior week. Analysts expected capacity to rise 6 percent to 78.3 percent.

Reflecting lessened demand in the U.S., Vienna's JBC Energy cited MasterCard Advisors latest report, noting that drivers had cut back by more than 6 percentage points year on year — and by 5 percentage points compared to the previous week.

In other Nymex trading, heating oil futures fell 2.67 cents to $2.479 a gallon, while natural gas futures rose less than half a penny to $6.77 per 1,000 cubic feet.

In London, November Brent crude rose 19 cents to $84.85 a barrel on the ICE Futures exchange.

Associated Press writers George Jahn in Vienna, Austria and Alex Kennedy contributed to this report from Singapore.