Traders are resigned to bad news

London's FTSE 100 index of blue-chip shares closed 71 points - or 2% - higher at 3,684 points.

On Wall Street, the Dow Jones rebounded by 78 points to close at 8,070, but the rise was modest compared to losses accumulated in the the previous four days trading.

There was also an end of day recovery in Paris, helping the Cac-40 close in positive terriotry, while Frankfurt's Dax surged in late trading to end 1% higher.

All major stock markets suffered significant losses on Monday due to fears over a lengthy war, but seemed more resigned to the political situation on Tuesday.

"The market is now somewhat used to the idea that this is going to be a longer, drawn-out war," said Paul Mackel from Dresdner Kleinwort Wasserstein, saying he expected the market to tread water until the next major news breaks.

Economic fears

The war is weighing on investors' minds because a long war is likely to have a significant impact on the global economy.

"The 24-hour coverage of the war news is having its way on people's psyche, and with every little story getting a headline we're being led to believe the war will be harder and longer than expected and that it will be hard on the economy," said James Caron, fixed-income strategist at Merrill Lynch.

Investors are also scrutinising each survey of retail spending, consumer confidence and manufacturing to try to piece together a longer term picture of the economy.