NEW YORK (Associated Press) - Oil prices fell sharply Friday, dropping at times below $123 for the first time in weeks as investors questioned whether prices have cooled off enough to reflect deteriorating demand.

Light, sweet crude for September delivery fell $2.33 to $123.16 a barrel in on the New York Mercantile Exchange. Earlier the contract dropped as far as $122.50, its lowest point since June 5.

In another sign that Americans continue to struggle with soaring energy prices, filling station operators hungry for business ratcheted down the average price for a gallon of regular by 2 cents, according to auto club AAA, the Oil Price Information Service and Wright Express.

A gallon of gas now sells for just a touch above $4, the first time it has been that low in nearly seven weeks. Prices have fallen about a dime per gallon in just the past week. Diesel dropped nearly a penny and a half to $4.774 a gallon.

Oil traders managed to post a gain of $1.05 a barrel Thursday, but analysts say the market's momentum points to further declines. Crude has fallen in six of the past eight sessions, and is trading more than 15 percent below its peak above $147 a barrel earlier this month.

"There's just nothing sufficiently bullish coming into the market right now to sustain a rally," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. "We're just seeing a new theme in which demand has become a very important part of the equation. ... For a long time, supply concerns dominated the landscape."

The U.S. dollar was nearly flat against the euro Friday, after a U.S. real estate trade group reported that sales of existing homes dropped nationwide by 2.6 percent in June, more than double the decline that had been expected.

Investors turn to oil and other commodities as a safeguard against inflation and a weaker U.S. dollar. When the dollar strengthens, it usually has a bearish effect on oil prices.

In other Nymex trading, heating oil futures fell 3.71 cents to $3.53 a gallon while gasoline futures lost 5.19 cents to $3.0075 a gallon. Natural gas prices sank 6.1 cents to $9.262 per 1,000 cubic feet.

In London, September Brent crude fell $2.14 cents to $124.30 a barrel on the ICE Futures exchange.