Poor US economic figures have caused nervousness across world markets and overshadowed earlier optimism after Iraq's decision to re-admit UN weapons inspectors.

In the US, shares opened higher for the first time in a week, but were soon knocked back by weak industrial data and a raft of company warnings.

Oil prices were also hit as the threat of imminent attacks in the Middle East eased, with Brent crude sliding nearly 4% towards $27 a barrel.

Analysts said the news of Iraq's concession had provided only a short-lived rally but that volatile markets were set to continue.

US falls reverberate

Immediately before the US markets opened, economic figures showed industrial production had fallen by 0.3% in August.

The Iraq anxiety has eased a bit, but we are still in a sea of uncertainty

Alan Ackerman, Fahnestock and Co.

This was the first fall in eight months and a much weaker performance than many analysts were expecting.

The bad news was compounded by warnings from fast-food giant McDonald's and drug wholesaler D&K Healthcare Resources.

McDonald's said poor sales would force it to cut profit estimates for 2002 and slow new openings. Its shares fell almost 13% to a seven year low, while D&K lost over 60% of its value after warning that lower sales would mean a cut in annual earnings.

Analysts said signs that the US economy was still struggling had re-ignited nervousness among investors.

Alan Ackerman, market strategist at Fahnestock and Co. said: "Rallies are such brief encounters that if you blink you miss them. The Iraq anxiety has eased a bit, but we are still in a sea of uncertainty".

Markets tumble In London, the FTSE 100 index surged over 100 points on news of Iraq's offer but the gains were wiped out by the end of day, as it the index closed down 19.2 points at 4025.1.

The US markets closed down at six-week lows, with the Dow Jones industrial index finishing176.99 points lower at 8,203.52 points while the more tech-based Nasdaq fell 15.99 points to close at 1,259.89.

David Brown, an economist at Bear Stearns, said: "The US industrial data is especially disappointing because manufacturing had been showing embryonic signs of life."

War premium fades

Iraq's offer to re-admit inspectors removed some of the recent gains in oil prices, with the cost of Brent crude down 55 cents at $27.97 per barrel as fears of disruption to supply were abated.

"Iraq's offer has taken some of the war premium out of the market," said trader Nauman Barakat at Fimat International Bank.

However, the US and UK have reacted with scepticism to the Iraqi offer.

Britain's home secretary David Blunkett said Iraq's president Saddam Hussein had "every intention of making a monkey of the rest of the world".

The White House meanwhile called the offer "a tactic that will fail".