NEW YORK (Reuters) - Oil prices rebounded sharply on Tuesday to near $110 a barrel after the U.S. Federal Reserve deepened interest rate cuts to fend off a recession.

An oil rig in a file photo. Oil jumped to a record above $111 a barrel on Monday, as a surprise weekend cut in the Federal Reserve discount rate and the fire sale of stricken investment bank Bear Stearns sent the dollar to all-time lows. REUTERS/File

The surge reversed heavy losses Monday that had been triggered by financial woes at investment banks, including Bear Stearns, which analysts said reflected weakness in the overall economy of the world’s largest energy consumer.

U.S. crude rose $3.82 to $109.50 a barrel by 2:30 p.m. EDT, after sliding more than 4 percent on Monday in the biggest one-day percentage drop in more than seven months. London Brent gained $3.74 to $105.49.

The Federal Reserve slashed a key U.S. interest rate by three-quarters of a percentage point on Tuesday, a substantial cut but smaller than many in financial markets had expected.

“After the initial disappointment, I think it leaves the door open for more cuts down the road,” said Mike Fitzpatrick, vice president of MF Global.

The Fed’s action took the bellwether federal funds rate down to 2.25 percent, the lowest since February 2005.

Aggressive interest rate cuts have contributed to a steep decline in the value of the U.S. dollar -- a factor that has supported gains across all commodities denominated in the currency in recent months.

Encouraging oil's gains on Tuesday, Wall Street firms Goldman Sachs Group Inc GS.N and Lehman Brothers Holdings Inc LEH.N reported better-than-expected earnings.

U.S. crude had hit a record high of $111.80 a barrel on Monday before selling off alongside other world financial bourses after JPMorgan Chase & Co stepped in to rescue investment bank Bear Stearns for a bargain buy of $2 a share.

Oil could come under further pressure, analysts said, due in part to rising inventory levels and the risk that an economic downturn could damage underlying demand.

Gasoline stockpiles in the United States are at a 15-year high and attention on Wednesday will focus on the latest snapshot of supplies from the U.S. Energy Information Administration.

Stocks of gasoline probably rose another 400,000 barrels last week while crude inventories probably gained 2.3 million barrels, a Reuters poll showed.