Share prices in New York rallied on Tuesday as investors returned to the market in search of bargains.

A modest recovery was also seen in European stock markets.

The Dow Jones index of leading shares in New York closed up 346.86 points at 7,938.79, a rise of 4.6%.

London's benchmark FTSE 100 index closed up 75.6 points at 3,797.4, a rise of 2%.

In Paris the Cac 40 index ended 51.1 points, or 1.8%, higher at 2,828.56, while in Frankfurt the Dax closed up 96.2 points at 2,865.23, a rise of 3.5%.

War fears eased

The rises followed heavy falls on both sides of the Atlantic on Monday when continuing fears about the state of the world economy and corporate profits, and the possibility of war with Iraq, spooked investors.

But news that UN and Iraqi negotiators had agreed to a resumption of weapons inspections in about two weeks time boosted US stocks.

The mood of investors was also helped by some upbeat corporate news from mortgage firm Fannie Mae and drug company Forest Laboratories.

The news helped the market to shrug-off figures which showed that US manufacturing shrank slightly in September for the first time in eight months.

"It's the first day of a new quarter. People are looking for bargains," said Arnie Owen, managing director of capital markets at Roth Capital Partners.

But he warned that not all stocks were looking cheap.

"It's a very selective game right now. And you have to be very careful," he said.

Gloomy outlook

Shares in Europe climbed despite some downbeat economic data.

German economic figures suggested that the weakness of the country's manufacturing sector would continue, while investment bank Morgan Stanley cut its forecast for the EU's economic growth next year from 2.7% to 1.5%.

"In our central case scenario, domestic demand will not accelerate before the second or third quarter of 2003," said Morgan Stanley economist Donui Agbokou.

Nervous markets

The drop in London share prices on the final day of September made it the stock market's worst month since October 1987.

And analysts warned that this month could be as bad.

City Index's Tom Hougaard said: "We have always seen plenty of volatility in October.

"The crash and bottom of 1987 happened in October, as was the low of 1998.

"I am not suggesting we are going to have a crash, but I am suggesting that October is highly likely to see a low."