NEW YORK — Oil prices tumbled more than $3 a barrel Tuesday as Tropical Storm Dolly grew increasingly unlikely to threaten supply, knocking out one more reason traders had to prop up prices.

The sell-off was a throwback to last week's sharp declines, and dragged crude to its lowest level since early June. A stronger dollar helped keep prices in check.

Light, sweet crude for August delivery fell $3.09 to settle at $127.95 a barrel in its last trading day on the New York Mercantile Exchange. Earlier the contract, which will be replaced by September crude Wednesday, dropped as low as $125.63. It was crude's fourth decline in the last five sessions.

An interim report released Tuesday by a federal task force set up to examine the sharp run-up in oil prices said that fundamental supply-and-demand factors are most likely to blame.

A number of lawmakers and other critics have blamed the historic rise in prices on speculators that they say are manipulating prices.

The Interagency Task Force on Commodity Markets, chaired by the Commodity Futures Trading Commission, was formed last month to examine investment practices and fundamental market factors.

The drop in prices Tuesday offered further evidence that investors who only a week and a half ago drove prices to a new high above $147 a barrel are now quickly pulling money out of the market. It was also a reminder that the lack of major news can push the market down in the same way that incremental supply concerns previously pushed prices sharply higher.

"This is more of the long exit from the market by the hedge funds," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. "A lot of these investors who have been supporting prices are hitting the road."

There are also new indications that high oil prices are killing off demand, especially in the U.S., the world's largest oil consumer.

In its weekly pump spending survey, MasterCard found U.S. gasoline demand dropped last week for the thirteenth week in a row. Demand fell 3.3 percent compared with the same week a year earlier, according to the survey. Since the start of 2008, gasoline demand is down 2.2 percent.

At the same time, three more airlines posted hefty quarterly losses — including a $2.3 billion charge by No. 2 carrier United — primarily because of rising fuel costs.

Oil prices rose Monday as Tropical Storm Dolly bore down on oil and gas installations in the Gulf of Mexico, but that did little to dent the steep declines left over from last week's sell-off.

"Most people I knew were looking for a stronger price rally," Ritterbusch said. "When we can't muster up much steam," he added, large investors dump bets that prices will rise because they sense there is little support for sustained gains.

At 11 a.m. EDT Tuesday, the center of Tropical Storm Dolly was located over the Gulf about 230 miles southeast of Brownsville. It was moving west-northwest at about 12 mph, putting it on course to miss major U.S. oil and gas platforms.

"Unless new projections put the storm on a more northerly track, it is unlikely to have a bullish impact on oil and natural gas prices," Addison Armstrong, director of market research at Tradition Energy, said in a research note.

Oil prices came under added pressure from a stronger dollar. The currency rose sharply against the euro after Charles Plosser, president of the Federal Reserve Bank of Philadelphia and a voting member of the Fed's Open Market Committee, said the central bank will probably need to boost interest rates "sooner rather than later."

The dollar's decline has been a major factor in oil's ascent, as investors bought dollar-denominated crude contracts as a hedge against inflation and a weakening greenback. When the dollar strengthens, such currency-related buying often unwinds.

Other energy commodities followed crude sharply lower.

Natural gas fell below $10 per 1,000 cubic feet for the first time since April. Prices for the power generation and cooking fuel dropped to $10.032 per 1,000 cubic feet, down 47.8 cents. Earlier, prices dipped as low as $9.889.

Natural gas has plummeted since early July, when it reached its highest point in more than two years following a sharp run-up fueled by expectations of strong summer demand.

"We're not getting a real hot summer as some had forecast," reducing the need for gas-fired electricity to power air conditioning, Ritterbusch said. "Natural gas had a much larger rally than crude this year. Now we're seeing a much larger decline."

Oil's decline lifting some weight from motorists. Retail gas prices continue to fall away, with the cost for a gallon of gas dropping more than a penny overnight to $4.055, according to AAA, the Oil Price Information Service and Wright Express.

It is the first time since January that gas has fallen for two consecutive weeks, analyst and trader Stephen Schork said. Still, a gallon of gas still costs 30 percent more than it did last year, or more than 80 cents, he said.

In other Nymex trading, heating oil sank 6.97 cents to settle at $3.6782 per gallon, while gasoline futures tumbled 7.01 cents to settle at $3.147 per gallon.

In London, September Brent fell $2.27 to settle at $129.55 a barrel on the ICE Futures exchange.