The US and European stock markets have moved lower, with optimism about a swift end to war in Iraq making way for fears about underlying economic conditions.

In the US, Wall Street see-sawed at its open as dealers said investors were now beginning to calculate the cost of war on an already weak economy.

The Dow Jones index closed down 2 points to 8,299 after having spent most of the beginning of the session in positive territory.

"We are in an in-between period where the news in Iraq seems to have reached a bit of stability," said Cary Nordan, equity analyst at BB&T Asset Management.

"We are watching the market to hear guidance ... on how the economy is doing post the Iraq peak of information and anxiety."

In Europe, London's FTSE 100 index closed down 67 points, or 1.7%, at 3,869.

The markets in the rest of Europe were also having a bleak day.

The French Cac 40 index ended the session 1.4% lower, while the German Dax closed down 1.5%.

Oil gains ground

Oil prices rose on Tuesday as hopes of a swift end to the war were outweighed by suggestions that the Opec oil producers' cartel was planning to cut production.

"After the war there is going to be a sharp reckoning," said Anais Faraj, a strategist at Nomura.

"I suspect markets will have to correct to account for the fact that corporate earnings are looking extremely rocky and economic numbers on both sides of the Atlantic don't look great at all."

In London, the price of Brent crude oil - a benchmark for global petroleum markets, was up 17 cents at $24.75, while US crude gained 4 cents to reach $28.00.

Oil prices have fallen by as much as 30% since the war in Iraq has gathered pace and investors began to factor in a swift conclusion.

But news of a possible glut in supply has prompted rumours that Opec will cut quotas.

Tough year ahead

Traders said investors seemed to be already factoring in an end to the war in Iraq within days.

We are cautious on the UK consumer, we think 2003 is going to be a tough year Martin Evans, ETrade

However, they warned that a number of disappointing corporate earnings hinted at a tough recovery ahead.

"As the war enters its final throes, investors' attention is swinging back to the state of the economy which remains weak," said Rupert Thompson at ETrade Securities.

The gloomy picture continued in the UK on Tuesday with Marks & Spencer, the UK's biggest clothing retailer, blaming tough conditions on the High Street for slowing sales growth.

"We are cautious on the UK consumer," said Martin Evans at ETrade.