NEW YORK (Reuters) - Oil prices plummeted more than 7% on Thursday, with the U.S. benchmark posting its worst day in more than four years, after President Donald Trump said he would impose additional tariffs Chinese imports starting Sept. 1.

FILE PHOTO: A pump jack operates in the Permian Basin oil production area near Wink, Texas U.S. August 22, 2018. REUTERS/Nick Oxford

The drop in Brent crude was the steepest in more than three years, undoing a fragile oil rally built on steady drawdowns in U.S. inventories even as global demand looked shaky due to the U.S.-China trade dispute.

Trump’s announcement of an additional 10% levy on $300 billion worth of Chinese goods undermined hopes that the world’s two largest economies had reached a detente in a year-long conflict that has weakened growth worldwide.

Brent crude LCOc1 fell $4.55, or 6.99%, to settle at $60.50 a barrel, after having dropped to $60.02, its lowest level since June 13. The international benchmark's decline on Thursday was its biggest daily percentage drop since February 2016.

U.S. West Texas Intermediate (WTI) CLc1 crude ended the session down $4.63, or 7.9%, at $53.95 after sinking to a low of $53.59, the lowest level since June 19. It was the biggest percentage decline since February 2015. More than 836,000 contracts changed hands, surpassing the daily average of about 623,000 contracts, according to Refinitiv Eikon data.

“The U.S.-China trade war has damaged the energy demand outlook greatly, already, and this will only add to those concerns,” said John Kilduff, partner at Again Capital Management. “The trade war is clearly far from over.”

Wall Street abruptly reversed its gains following Trump’s tweets, after spending most of the session on track for the best day since June. Bond prices also rose, causing yields to drop as investors sought out safe assets.

Oil prices were already weak on continued reaction to the Federal Reserve on Wednesday. The Fed cut rates as expected, but market sentiment turned negative after Fed Chairman Jerome Powell said the move might not be the start of a lengthy series of cuts to shore up the economy against global weakness.

Crude prices could see bearish momentum remain after breaking below critical support levels on Thursday, said Edward Moya, senior market analyst at OANDA in New York.

Inventories at the Cushing, Oklahoma, hub, the delivery point for U.S. crude futures, fell by 1.5 million barrels between Friday and Tuesday, traders said, citing data from market intelligence firm Genscape.

But U.S. output remained near a record, above 12 million barrels per day (bpd), making the country the biggest producer in the world.

Output in Texas, the largest producing state, rose by 16,000 bpd to 4.97 million bpd in May, a record high, U.S. government data showed.

Graphic: U.S. crude inventories, weekly changes since 2017 - tmsnrt.rs/2y7mC9g

“The market was already wobbly on reports by analysts that production would increase faster than demand by 1 million barrels per day in the new year,” said Phil Flynn, analyst at Price Futures Group in Chicago.

“But the final straw for the oil market was when Trump imposed these additional tariffs and caught the market by surprise.”

U.S. manufacturing activity slowed to a near three-year low in July, and construction spending fell in June as investment in private construction projects tumbled to its lowest level in 1-1/2 years.

Total U.S. oil demand in May fell 98,000 bpd to 20.26 million bpd, data showed on Thursday.

OPEC and partners including Russia, an alliance known as OPEC+, have been curbing output this year to support the market. In July, OPEC production revisited a 2011 low, helped by a further cut by Saudi Arabia, a Reuters survey showed.