The violence in Libya and continuing unrest across the Middle East have pushed oil prices into a "danger zone" that could threaten global economic recovery, the International Energy Agency has warned.

Fatih Birol, the IEA's chief economist, said high prices could put pressure on central banks to raise interest rates, especially in more developed countries such as the UK. "Oil prices are a serious risk for the global economic recovery," he said. "The global economic recovery is very fragile – especially in OECD countries." He said oil prices had entered a "danger zone" for the recovery at over $90 a barrel.

Brent crude prices fell back slightly from Monday's two-and-a-half-year high of $108.70 a barrel, but US oil prices at one stage rose by more than $8 a barrel to hit $94.49, the highest level since October 2008. That increase was partly a catch-up after the US markets were closed on Monday, but prices are also being driven by fears that unrest could spread to Saudi Arabia, the world's biggest crude exporter.

Saudi oil minister Ali Naimi said: "Whatever is happening in Libya, the disruption to oil markets has not happened. When we see a shortage in supply, we will rectify that immediately." After his comments US crude settled at $93.57 a barrel.

As Libya's Muammar Gaddafi vowed to die "a martyr", US stock markets tumbled. The Dow Jones Industrial Average fell 178.46 points, or 1.4%, to 12212.79, its biggest drop since 16 November. The Standard & Poor's 500 fell 27.57, or 2.1%, to 1315.44, its biggest drop since 11 August 2010.

In Britain, motoring groups said the government now had no choice but to scrap the fuel duty rise of up to 5p a litre planned for April.

The chancellor, George Osborne, said he would review the planned automatic increase in the budget on 23 March. The AA and petrol retailers' group RMI Petrol pointed out the intended rise would come just as the $10-a-barrel rise filtered through to forecourts, as it takes up to five weeks for changes in crude prices to have an impact. Brian Madderson, the chairman of RMI Petrol, said: "Prices at the pumps going up in the space of a few weeks by 5p a litre – plus the 5p duty rise – would be beyond belief."

Pump prices hit a new high on Monday, with petrol costing 128.95p a litre and diesel 134.31p – up almost 20% on a year ago.

The rise in prices will worry policymakers as well as consumers as it pushes up inflation, which in Britain hit 4% last month, twice the Bank of England's target, and was already forecast to go higher this year. The cost of road fuel makes up about 5% of the basket of goods and services the Treasury uses to estimate inflation.

The FTSE 100 fell by 90 points at one stage as concern mounted about Libya and the price of oil, but the better than expected tax receipt figures provided welcome relief and helped the market recover some ground. On Wall Street the Dow Jones was down 160 points at 12,231 by mid-afternoon, catching up after the Presidents' Day holiday.

Oil groups ENI and Repsol said they would cut production in Libya, joining German company Wintershall, which said on Monday it was winding down its 100,000 barrel-a-day operation.

More than 8% of Libya's 1.6m barrels of daily production has been cut since the weekend. There were reports of Libyan marine oil terminals being disrupted by the communications blackout in the country.

Energy ministers from the world's biggest oil consumers and producers, including Opec, held a scheduled International Energy Forum meeting in Riyadh, Saudi Arabia. Birol said that if supplies were disrupted, OECD countries could release some of their 1.6bn barrels of emergency stocks.

Saudi Arabian oil minister Ali al-Naimi said Opec was ready to pump more oil if necessary, reassuring markets, but Barclays Capital analysts said oil prices would have to go higher for the Saudis to act.

Dr Manouchehr Takin, from the Centre for Global Energy Studies, said: "If Opec is going to take action, which carries a risk, it's in their interests as producers to take a risk on the upside for oil prices.

"It wasn't that long ago – in June 2008 – that the Saudis agreed to pump more oil to bring prices down. By the end of the year they had more than halved when the financial crisis struck."