By Myles Neligan BBC News Online business reporter

Can the FTSE keep it up?

2003 has brought some relief to investors battered by three consecutive years of falling share prices, but lingering uncertainties will dampen their end of year celebrations.

In London, the benchmark FTSE 100 share index is on track to close for the year slightly above the 4,400 mark, after hovering below it for much of the last three months.

That would put the index's 2003 closing level in the middle of the 4,200 - 4,600 range forecast by City analysts a year ago, and about 11% up on last year's close of 3,940.

It would also mark the FTSE's first year-on-year gain since the heady days of 1999, when, fuelled by what turned out to be the last gasp of the internet boom, it finished the year at an all-time high of 6,930.

In the black

The market's gains will be warmly welcomed by investors who have watched share prices collapse under the weight of the dot.com bust, terrorist attacks, and accounting scandals in the intervening three years.

FTSE end-2004 forecasts Deutsche Bank 5,000 Fyshe Investment Group 4,850 Reuters poll mid-range 4,825 Barclays Stockbrokers 4,660 Merrill Lynch 4,400

They will be especially relieved because as recently as March, the FTSE was languishing below 3,300, pressured by fears that the looming Iraqi war would destabilise the global economy.

In the event, a quick victory by coalition forces and news of a surge in US corporate profits over the summer lifted investors' spirits, triggering a remarkable recovery on Wall Street and in the City.

The FTSE is now up by over 30% since mid-March, while the Dow Jones has notched up even stronger gains, recently breaching the symbolic 10,000 level for the first time in 18 months.

Share prices are thought unlikely to repeat that spurt of growth, seen as a one-off 'relief rally', in the months ahead.

Upside

But many investors think there are still plenty of reasons to be cheerful as we head into the new year.

The Americans have brought growth forward, but that needn't be a huge problem Hilary Cook, Barclays Stockbrokers

Forecasters are in cautious mood after largely failing to predict the steep downturn of the last three years, but most expect further gains in 2004.

Last week, a Reuters poll of 100 City analysts found that their mid-range forecast for the FTSE by the end of next year is 4,825, about 9% up on its current level.

The most upbeat forecast came from Deutsche Bank, which expects the index to reach 5,000 by New Year's eve 2004.

Optimists believe the US Federal Reserve will keep interest rates on hold at 1% for most of next year, giving companies enough breathing space to start growing again rather than merely boosting their profits by cutting costs.

At the same time, the booming Chinese economy and a gradual improvement in the euro zone should underpin world demand, easing the US trade deficit, and setting the scene for a solid global recovery.

Share prices will make progress next year, but it will be hard won Jeremy Batstone, Fyshe Investment Group

"The Americans have brought growth forward by keeping interest rates very low," says Hilary Cook at Barclays Stockbrokers.

"But that needn't be a huge problem provided the rest of the world picks up the running."

Downside

But some market watchers are less sanguine, warning that any pick-up in global growth may come too late to relieve the pressures weighing on the US dollar.

The dollar has fallen sharply against the euro in recent months as foreign investors become increasingly reluctant to finance the US' spiralling trade and budget deficits.

One danger is that a further plunge in the value of the greenback will price eurozone exports out of the US market, stopping Europe's tentative recovery in its tracks.

Another is that the US central bank may be forced put up interest rates aggressively in order to prop up the ailing currency.

That could curb spending by heavily-indebted consumers, depriving the US economy of its principal growth engine.

Earlier this month, economists at ABN Amro warned that this scenario would be "consistent with a deep US and global recession."

The probability of making a gain over the next few years is very, very low David Schwartz, stock market historian

"Share prices will make progress next year, but it will be hard won," says Jeremy Batstone at Fyshe Investment Group.

"We will most likely see continued indications of a cyclical economic recovery set against a background of profound structural imbalances."

Market trends

Overshadowing all of these uncertainties is the threat of a further large-scale terrorist attack, a development which would throw the financial markets into reverse.

And according to stock market historian David Schwartz, an analysis of historical trends does not support the view that shares are firmly set on an upward path.

"The probability of making a gain over the next few years is very, very low," he says.

Mr Schwartz sees the current rally as a short-lived blip in a wider downward trend as the market gives back the exceptional gains it achieved during the 1980s and 1990s.

He expects US share prices to enter a prolonged period of stagnation or start falling back again next year.