A recognition that the US-led war in Iraq could take longer than initially expected drove stocks down across the world yesterday, bringing last week's broad-based rally to an abrupt end.
European shares and the US blue-chip Dow slid toward their sharpest single-day drop since September. The Dow fell by more than 3.5 per cent after it capped an eight-day rally on Friday that added almost 1,000 points and marked its best weekly gain in 20 years.
The Dow closed at 8214.68, a fall of 307.29 or 3.61 per cent. The tech-laden Nasdaq closed at 1369.78, down 52.06 or 3.66 per cent.
"The war is not a cake-walk and this will sober up some of the traders betting on a quick recovery," said Mr Alan Ackerman, market strategist at Fahnestock & Co in New York.
"The fighting on the ground could be very nasty and could be unpredictable and could take longer than many expected," he added.
In London, the FTSE 100 index of leading shares dropped 3.05 per cent to 3,743.3 points. Insurers were among the worst-hit, while a soft trading update from Anglo-Dutch consumer goods giant, Unilever, knocked consumer cyclical stock.
Mr Scott Penrose, analyst with NatWest Stockbrokers in London said the falls were entirely attributable to the perceived difficulties encountered by US-led troops in Iraq.
"The market ran a little bit too far ahead last week and now with the slightest bit of bad news, we have a pull-back," Mr Penrose said.
Volumes in London were low when compared to the "euphoria" of last week," he added. Shares in Dublin held up well amid the sharp drops, with the Iseq shedding less than 2 per cent.
"The rally of last week was a little bit irrational. This despondency has a little more rationality to it" said one Dublin dealer.
The German DAX 30 index slumped 6.14 per cent to 2,548.37 points and the French CAC 40 index gave up 5.67 per cent to 2,726.85 points. The DJ Euro Stoxx 50 index shed 5.53 per cent to 2,124.78 points.
Analysts, who expressed concern about the longer term, said some of the sell-off was related to profit taking after last week's gains.
"The longer this goes on the bigger the drag on the economy. And the bigger the drag on the economy the less rebound in corporate profits," said Mr Steve Previs at Jefferies International.
"If this drags on for two or three months it would be disaster for the market and a disaster for the economy."
Earlier, Tokyo's Nikkei stock average jumped 2.9 per cent in a delayed reaction to gains late last week on Wall Street, as Japanese markets reopened after a holiday on Friday. The Nikkei rose 240 points to 8,435.07.
The dollar, which hit two month highs on both the euro and safe haven franc on Friday, slid to $1.0643 per euro and 1.3850 Swiss francs. - (Additional reporting, Reuters)
