By Scott DiSavino and Laila Kearney

NEW YORK (Reuters) -Oil prices fell about 1% to a near two-week low in volatile trade on Wednesday after the U.S. Federal Reserve delivered another hefty rate hike to quell inflation that could reduce economic activity and demand for oil.

The Fed raised its target interest rate by 75 basis points for the third time to a 3.00-3.25% range and signalled more large increases to come. Risk assets like stocks and oil fell on the news, while the dollar rallied.

Brent crude futures settled 79 cents, or 0.9%, lower at $89.83 a barrel, its lowest close since Sept. 8, while U.S. West Texas Intermediate (WTI) crude fell $1.00, or 1.2%, to $82.94, its lowest close since Sept. 7.

Earlier in the session, oil gained over $2 a barrel on worries about a Russian troop mobilization before dropping over $1 on a strong U.S. dollar and lower U.S. gasoline demand.

U.S. gasoline demand over the past four weeks fell to 8.5 million barrels per day (bpd), its lowest since February, according to the U.S. Energy Information Administration (EIA). [EIA/S]

"The stand-out data point is the continuing weakness in gasoline demand. It's really what's been haunting this market," said John Kilduff, partner at Again Capital LLC in New York.

The U.S. Energy Information Administration reported a 1.1 million barrel increase in crude stocks last week, half the build analysts forecast in a Reuters poll. [API/S]

Russian President Vladimir Putin called up 300,000 reservists to fight in Ukraine and backed a plan to annex parts of the country, hinting he was prepared to use nuclear weapons.

U.S. President Joe Biden accused Russia of making "reckless" and "irresponsible" threats to use nuclear weapons.

Oil prices soared to a multi-year high in March after the Ukraine war broke out. European Union sanctions banning seaborne imports of Russian crude will come into force on Dec. 5.

"Much of today’s downside appeared related to strength in the U.S. dollar and we still view near-term U.S. dollar direction as a critical component in assessing near-term oil price direction," analysts at energy consulting firm Ritterbusch and Associates said.

The dollar was on track for its highest close in over 20 years against a basket of other currencies, making oil more expensive for buyers using other currencies.

Signs of a recovery in Chinese demand gave prices a lift early in the session.

In the United States, however, the economic news was not so good. Existing home sales dropped for the seventh straight month in August as affordability deteriorated further amid surging mortgage rates.