The price of oil fell to its lowest point since mid-August yesterday, continuing a week-long downward trend, after Iraqi President Saddam Hussein said hostages held by his country would be released.

With worldwide oil production exceeding demand and the threat of war in the Persian Gulf seeming to diminish, there was little reason for traders to interrupt the week's price slide, market analysts said.

In trading on the New York Mercantile Exchange, the price of a 42-gallon barrel of light sweet crude for January delivery closed yesterday at $26.40, off 89 cents from Wednesday. It was the first time since Aug. 15 that the price had closed below $27. At one point in late September, the price briefly exceeded $40 before falling back.

But the recent crude oil slump has not carried over into gasoline prices, which rose last week, mostly because a 5-cent-a-gallon increase in the federal gasoline tax took effect on Saturday. The American Automobile Association Potomac Region said the average Washington-area price for a gallon of unleaded regular gasoline was $1.435, up from $1.398 the previous week.

Nationwide, according to AAA, the average price of a gallon of self-serve regular unleaded was $1.387. That is 31.2 cents higher than the price on Aug. 1, the day before Iraq invaded Kuwait. It is close to the highest gasoline price ever reported by AAA, in 1981, but well below the all-time high when adjusted for inflation.

The New York futures price for oil has become the benchmark for trading worldwide, although little oil is actually sold at that price. Its role in oil pricing is similar to that of the prime rate in bank lending, setting a mark by which other transactions are carried out.

The New York price decline followed a huge sell-off in the London market, where prices tumbled more than $2 a barrel within minutes of the Iraqi announcement about releasing hostages.

"All we're doing is taking the price down because the war fears are diminished," said Michael McDermott, an oil broker at Paine Webber Inc. in New York.

"What seems to have happened is that we've switched over to a buyer's market," said Michael Lynch, an oil analyst affiliated with Washington International Energy Group. "People suspect that there will be peace, or that even if there's war it won't have a big impact on oil supply."

"There was an assessment that this {Iraqi announcement} would materially affect things and lower the temperature" of the Persian Gulf standoff, said Alan H. Levine, a futures broker at Shearson Lehman Brothers Inc.

But he noted that the closing price represented a rally of about $1 from the day's low and attributed the market's shifts to uncertainty among the traders. "You could feel the tension between the bulls and bears because we basically don't know what to do here," he said.

The price might be lower if Japan had not hoarded crude oil in the months after the Iraqi invasion, a senior Energy Department official said yesterday.

Linda Stuntz, deputy undersecretary for policy, told a group of reporters that "if everybody in the world did what Japan is doing, we would have a much more serious problem than we do. Prices would be a lot higher."

Many participants in the oil market and analysts of price trends believe that the current oil crisis has had less direct impact on consumers than those of the 1970s because the existence of a futures market has assured refiners and distributors they can replace their stocks, reducing the incentive to hoard. But Stuntz said the Japanese, rather than drawing down their supplies after the invasion, accelerated their imports, adding to the upward pressure on world prices.

Japan imported 33 percent more oil in October than it did in July, she said. "That is stockpiling," she said. Stuntz said she expected the issue to be raised at a meeting next week of the governing board of the International Energy Agency.

Throughout November, the price of crude oil ranged between $29 and $35 a barrel. As recently as last week, on Nov. 29, it was almost $33. But since then, President Bush has offered to send Secretary of State James A. Baker III to Baghdad, Iraq has said it would free the hostages and reports from several sources have confirmed that oil supplies are generally adequate.

Analysts said these reports, coupled with a drop in consumption caused partly by price and partly by an economic slowdown in the industrialized nations, have pushed oil prices down.

But analysts also agreed that the market is so volatile that virtually any piece of negative news from the Middle East could send the price shooting back up.