A triple whammy of concerns over the US economy, fears of conflict with Iraq and higher US unemployment has sent shares tumbling.

It's a glum perspective on the economy

Carl Steidtmann Deloitte Research

In Europe, London's benchmark FTSE 100 index closed down 125 points with French and German shares also showing sharp losses.

And in the US, the Dow Jones industrial average closed 201 points lower.

"The news economic-wise is not great and with the Iraq situation, there's a lot of uncertainty as well," said Scott Wren, equity strategist at AG Edwards.

The share losses followed a warning from Alan Greenspan, chairman of the Federal Reserve, that the country's economy - the world's largest - was still suffering from the "depressing effects" of share price falls and last year's 11 September attacks.

"It's a glum perspective on the economy," Carl Steidtmann, chief economist at Deloitte Research, said.

Oil price fears

US President George W Bush stoked concerns over war against Iraq when, in a speech, he said that action "would be unavoidable" unless UN workers heightened efforts to force disarmament on Baghdad.

Thursday's markets

New York: Dow Jones, -2.4% New York: Nasdaq, -2.7% London: FTSE 100, -3.0% Paris: Cac 40, -4.6% Frankfurt: Dax, -4.5% Tokyo: Nikkei, +0.2%

"We cannot stand by and do nothing while dangers gather," Mr Bush told the UN General assembly.

"We must stand up for our security and for the permanent rights and hopes of mankind."

The spectre of war has raised fears in particular of soaring oil prices, which could severely dent hopes of a rapid recovery from the global economic downturn.

"The main question is 'would Saudi Arabia increase production if we did see another sharp rise [in prices]'," said Andrew Hobson, fund manager at UK-based Exeter Asset Management.

Main losers

Investor sentiment was further hit by an unexpected rise in the number of unemployment benefit claimants in the US.

Phil Orlando, chief investment officer at Value Line Asset Management, said: "It's disconcerting. It suggests that the economy is certainly weaker rather than stronger."

Stocks under pressure in New York included shares in fast-food giant McDonalds, which fell 4.8% after a warning from analysts at Goldman Sachs of uncertainties over the firm's future.

Shares in Sun Microsystems fell 4.4% to levels last seen in late 1996, after analysts at Salomon Smith Barney warned over the profits outlook for the network computing firm.

In London, losers included BAE Systems shares, which slumped 14% after a disappointing profits announcement.

Shares in mobile phone giant Vodafone fell 6% after UBS cut its rating on the stock from "strong buy" to "hold".

Earlier, the key Tokyo index, the Nikkei 22, ended 15.15 points higher at 9,415.23.