Crude prices Tuesday tumbled amid a possible ceasefire agreement between Israel and Hamas, which eased markets' previous concerns about oil supplies disruption in the Middle East.

Israel and Hamas were holding truce talks brokered by Egypt in Gaza Strip following days of fighting between the two sides. Egyptian officials said an agreement was hoped to be reached late Tuesday, but still not finalized, while Israeli officials stressed the agreement was still up in the air as the violence in Gaza continued into the seventh day.

Despite the lingering uncertainty about the cease-fire agreement, the fears for oil supplies disruption in the Middle East eased, pushing both U.S. crude and Brent crude sharply down.

The demand for crude was further pressured after the Federal Reserve Chairman Ben Bernanke delivered a speech on Tuesday, saying the "fiscal cliff" poses a threat to the economic recovery, but the central bank had no more tools to offset its negative effects.

The dollar edged up against the euro as investors weighed negative news that Moody's Investors Service cut France's government bond rating by one notch to Aa1. Moody's also maintained the negative outlook against the hopes for another round of bailout fund to Greece.

The greenback rose to a seven-month high against the Japanese yen. A stronger dollar made the dollar-denominated crude oil less attractive.

On the economic front, the Commerce Department said on Tuesday that housing starts rose 3.6 percent to a seasonally-adjusted 894, 000 in October.

Light, sweet crude for January delivery lost 2.53 dollars, or 2. 83 percent, to settle at 86.75 dollars a barrel on the New York Mercantile Exchange. Brent crude for January delivery also dropped sharply and last traded around 109 dollars a barrel.