TESCO has fired the latest shot in a supermarket price war by slashing 3p a litre off the price of unleaded and diesel at its 430 filling stations.

The price cut follows figures from motoring organisation the AA showing the price of petrol has hit a three-year low.

The AA said the average cost of petrol at the beginning of this week was 87.79p a litre, compared with 88.27p at the end of December 2005.

Diesel now averages 99.72p a litre – the lowest price since November, 2007.

Petrol hit a record high of 119.7p a litre in July this year – but price falls since then means the average UK driver is now paying nearly £16 less to fill up a typical 50-litre tank than during the summer.

A family with two petrol cars is now spending £68.39 less a month on fuel on average.

Tesco said its lowest petrol price was now 82.9p a litre.

Chris Stern, of Paddock-based C & J Stern (Oils) Ltd, said other retailers were likely to follow Tesco’s lead.

He said: "All the pointers are that prices will continue to decline, although the fall in the value of sterling against the dollar will put a brake on any ‘serious’ fall in price because oil has to be paid for in dollars."

Mr Stern said prices at the pumps in Huddersfield were about 85.9p for unleaded and 97.7p for diesel.

But he cautioned: "The Government has announced another 2p duty on petrol from April and if the price of oil continues to fall I am sure that will go ahead. That will give retailers less room for manoeuvre because duty and VAT accounts for 80% of the pump price.

New York-traded crude oil hit a record 147.27 US dollars a barrel on July 11 – driven by speculation that soaring growth in emerging economies, such as China and India, would boost demand for crude.

However, prices went into reverse in the second half of 2008 as the global economic crisis hit consumer spending and industrial production.

The New York price fell to its lowest in almost five years at 33.87 earlier this month.

However, fears that the conflict between Israel and Hamas in Gaza could heighten tension in the oil-rich Middle East have since lifted prices towards 40 US dollars a barrel.

The AA said petrol sales in the third quarter of 2008 – when prices peaked – fell by 8.2% compared with the same time last year.

AA spokesman Paul Watters said: "Families are making substantial savings from the fall in pump prices in recent months, although our research shows that many are still cutting back through fear or the impact of the economic slowdown."