Volatility on the stock markets in India and Pakistan has continued as a fifth day of fire fights in Kashmir fuelled fears that the two nuclear countries were heading for war.

India's main share index hit its lowest level for the year, closing down 2.59% at 3,197.9, on news that New Delhi had moved more troops to the border, where a million soldiers were already facing each other.

Pakistan has introduced tighter trading curbs

"Increasingly, the possibility of a war looks imminent," said Bharat M Shah of Vikram Kenia Securities.

In Pakistan, the key Karachi share index closed down 2.98% at 1,598.1, after a plunge on Monday prompted the stock exchange to tighten the curbs on daily falls.

Credit rating agency Standard & Poor's warned on Monday that both countries could be downgraded if the crisis continues.

Both the Indian and Pakistani rupees remained relatively stable, as both currencies are only partially convertible.

Markets down

The benchmark Bombay share index has fallen over 8% in the last seven days since an attack on an Indian army camp, which India blamed on Pakistan-based militants, left more than 30 dead.

The Karachi Stock Exchange's 100-share index has dropped 11.5% over the same period, including a 7.4% fall on Monday, its second-biggest drop ever.

Late on Monday the Karachi exchange, one of Asia's smallest with a capitalisation of $6.9bn, cut the limit by which individual shares can fall in a day's trade to 5% from 7.5%.

Foreign investors nervous

The volatility of the Indian stock market, due also to the worst rioting in Gujarat for decades, has already caused foreign investors to reduce their investments.

"Foreign funds have already cut their positions as war rhetoric continues to rise on both sides," said Tan Choon Hoe, Singapore-based fund manager with AIB Govett.

"While it is unlikely that a nuclear war will happen, an escalation of tensions will result in a slowdown in economic activity," he said.