Investors await a last round of diplomacy

Traders said investors were hoping for a short, sharp war that would not cause lasting damage to the world economy.

For the same reason, the US dollar rose sharply against the euro, while the price of oil fell slightly.

But as a sign of continued uncertainty, demand for gold surged as well. One ounce of gold now costs $342.5, a gain of 2% or about $6. "Gold has rallied strongly today, with the threat of conflict in Iraq remaining the driving force, said John Reade at UBS Warburg.

Yo-yo markets

Iraq just means uncertainty - and uncertainty adds to volatility Barry Hurwitz, HSBC Securities

In Europe, most stock market indexes had opened with losses of more than 2%. Amsterdam, for example, saw its main share index fall 3.5%, while France's Cac 40 was 4% lower in early trade.

But during the afternoon all European stock indexes staged spectacular recoveries.

They were helped by healthy gains on Wall Street, which saw only a brief fall when the United States, the UK and Spain confirmed that they would not be seeking a vote in the UN Security Council on the proposed second resolution on Iraq.

The Dow Jones index had gained more than 3.6% to close at 8.141.9, while the Nasdaq gained 3.9% to finish at 1,392.3.

In London, meanwhile, the FTSE 100 index closed 122 points or 3.35% higher at 3,722 and Frankfurt's Dax was up 4%.

Hopes for a short war also caused oil prices to slump. In London the price of one barrel of Brent Crude oil dropped by 83 cents to $29.30.

A rerun of 1991?

But for some in London, the rally looks more like a knee-jerk reaction than any rational attempt to set a price on future events.

"There's a lot of idiots out there thinking it'll be a rerun of 1991" where a rapid victory over Iraq triggered a strong rally, said one strategist at a London investment bank.

"But then we were running a bull market; now we're in the depths of a bear market. In any case, how can you make reliable decisions when even the vaguest of predictions is probably going to be wrong?"

With President George W Bush tonight expected to tell Saddam Hussein to leave Iraq or face military action, all eyes, he said, will be on the oil fields of Kirkuk and Mosul.

There are fears that Saddam will set fire to these oil fields as a last gesture of defiance.

The structure of Iraqi oil fields means the fields are likely to be permanently destroyed if they are torched, oil experts say.

Gyrations

World stock markets enjoyed an unexpected rally at the end of last week, all closing in positive territory.

But as the prospect of war intensifies, traders have warned that the short-term gains were as much the result of so-called "bottom fishing" - buying stocks at hammered down prices - as the start of a sustained rally.

"Iraq just means uncertainty - and uncertainty adds to volatility," said Barry Hurwitz, a trader at HSBC Securities.