NEW YORK (AP) _ Oil prices tumbled even lower today to levels not seen since August, then edged back up in uncertain trading after Iraqi President Saddam Hussein said all of his foreign hostages should be released.

Light sweet crude oil fell about $2 per barrel this morning on the New York Mercantile Exchange on contracts for delivery in January. But prices rebounded somewhat by midday. With a little more than two hours left to trade this afternoon, light sweet crude oil was down 99 cents from Wednesday's close, at $26.30 per barrel.

Unleaded gasoline for next-month delivery was down 3.34 cents at 65.50 cents a gallon by late this morning. It fell at one point to within less than a penny of the price it commanded on Aug. 1, the day before Iraq invaded Kuwait.

Home heating oil was trading at 77.70 cents a gallon, down 3.44 cents, on contracts for delivery in January.

The rapid plunge today followed crude's drop of $3.37 per barrel on Wednesday, as prospects for war in the Persian Gulf apparently diminished.

''Word came out that Hussein is releasing the hostages and it fell $1.50, just like that,'' said Ann-Louise Hittle, a senior oil analyst with Shearson Lehman Brothers Inc. ''We're seeing an erosion of the war premium.''

Saddam today informed his parliament that foreigners no longer needed to be detained to deter an attack by the U.S.-led multinational force in the Persian Gulf.

Oil for next-month delivery had not closed below $28 per barrel since Aug. 31, when it closed at $27.32, the exchange said. Wednesday's close for gasoline was the lowest since Aug. 2 and the close for heating oil was the lowest since Aug. 31.

Prices also skidded today in frantic activity in London. January contracts for North Sea Brent Blend, the most widely traded international crude oil, fell to $25.60 a barrel from $27.35 late Wednesday.

In the four months since Iraq seized Kuwait, speculation about a war- induced oil crisis has pushed prices as high as the $41 a barrel level. Many oil strategists have said the market will continue to act unpredictably until the crisis shows decisive signs of ending.

The market swung wildly on headlines Wednesday. A brief rally led by saber- rattling from Secretary of State James A. Baker III failed to sustain any buying momentum. Prospects of peace soon took control and pushed prices down.

The final shove came in the afternoon, when the U.S. government announced Iraq had agreed to top-level diplomatic meetings to discuss the desert standoff.

''Although the rhetoric from Bush and Baker is still pretty tough, at least now there's going to be some kind of discussion between the two parties and the ground rules are becoming clearer,'' said Christian Gohler, a broker at Merrill Lynch Energy Futures.