Oil prices tumbled Wednesday, extending a steep and unusually volatile slide into a second day, after the government reported a surprising spike in U.S. crude and gasoline supplies.

Light, sweet crude for August delivery dropped $4.50 to $134.24 a barrel in morning trading on the New York Mercantile Exchange. Prices fell $6.44 Tuesday in the biggest one-day drop in dollar terms since the Gulf War.

The two-day slide marks a dramatic turnaround in crude prices, which as recently as Friday traded at record highs above $147 a barrel. But even with this week's sell-off, prices remain about 80% above where they were a year ago and up about 40% from the start of the year.

Perhaps just as significant as the declines is the sudden increase in volatility. Prices whipsawed by more than $10 Tuesday and by more than $7 Wednesday.

"I think anyone you talk to would have to be surprised by the magnitude of these huge price swings. This is extreme price volatility that no one can predict," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates.

"Extended two-sided volatility like this is indicative of an impending price top," he added. "People wanting to get out are just as enthusiastic as people trying to get in."

Sharply increased crude and gasoline supplies were the immediate cause of Wednesday's decline.

The Energy Information Administration reported that U.S. crude oil supplies rose by 3 million barrels, or 1%, last week. That is the opposite of the 3 million barrel draw analysts surveyed by energy research firm Platts expected. Gasoline supplies also leapt unexpectedly.

"The numbers were decidedly bearish on just about all fronts," Ritterbusch said.

Industry observers cautioned that prices could still bounce back, just as they have following large drops in recent weeks. Yet concerns are growing that high energy prices are leading to real shifts in consumer behavior that could cause demand to shrivel considerably.

The Labor Department said consumer prices shot up 1.1% last month, the second fastest pace in 26 years. Rising energy prices accounted for two-thirds of that increase, which was far worse than expected.

Testifying before Congress on Tuesday, Federal Reserve Chairman Ben Bernanke warned that the "upside risks to the inflation outlook have intensified lately, as the rising prices of energy and some other commodities have led to a sharp pickup in inflation and some measures of inflation expectations have moved higher."

American Airlines and Delta Air Lines, two of the three biggest U.S. carriers, each reported a loss of more than $1 billion in the second quarter, largely because of higher fuel costs.

"With each passing day, we are reading about more car companies cutting back on production, airlines slashing flights, and consumers driving less," said Edward Meir, an analyst at MF Global. "Of course, these are not new factors, and energy markets have ignored them for several months now as they have relentlessly pushed higher, but we suspect that as the pace of demand destruction accelerates it will be harder to ignore."

The dollar strengthened against the euro, giving traders less reason to go bargain shopping in the suddenly discounted energy market. A weaker dollar has enticed investors to buy oil and other commodities as hedges against inflation and a weakening dollar, but that incentive diminishes when the dollar gains ground.

It will be some time before any declines -- assuming they hold -- show up at the gas pump, where prices continued to advance.

U.S. retail gasoline prices added half a cent to $4.114 per gallon, according to auto club AAA, the Oil Price Information Service and Wright Express. Diesel prices also marched higher, up nearly a penny to $4.839 a gallon.

In other Nymex trading, heating oil futures shed more 8 cents to $3.8345 a gallon while gasoline futures lost over 12 cents to sell for $3.2616 a gallon. Natural gas futures fell 21.5 cents to $11.262 per 1,000 cubic feet.

August Brent crude fell $3.24 to $135.51 a barrel by midday Wednesday on the ICE Futures exchange in London.