A two-week rally on Wall Street has come to an abrupt halt, dampening hopes of a sustained stock market recovery.

The Dow Jones index of leading US shares closed down 2.1% on Thursday at 8,317, while the tech-heavy Nasdaq settled 1.6% lower at 1,299.

The weaker close prompted fears that a share price bounce which began earlier this month could turn out to be nothing more than a temporary blip, with further sharp declines still to come.

Leading US stocks, pressured by sluggish economic growth, corporate accounting scandals, and fears over war in Iraq, have been stuck in downward spiral all year.

Last month, the Dow fell to its lowest level in five years, while the Nasdaq touched a six-year low.

War jitters

The latest decline came in response to renewed fears over war in Iraq and downbeat corporate news.

Tensions over Iraq mounted amid reports that Baghdad had ordered foreign journalists to leave the country by next week.

On the corporate front, press reports that software giant Microsoft may be under investitation for failing to abide by its antitrust settlement with the US government weighed on investor sentiment.

Microsoft shares fell 3.7% to $51.23.

The chemical sector was also in the spotlight following news that a jury in West Virginia had found Dow Chemical liable for exposing workers to asbestos.

The chemical giant's shares fell more than 9% to $24.97.

The news outweighed official data showing that new US jobless benefit claims fell sharply last week.

Cash in hand

Analysts said the market's decline also reflected profit-taking by investors keen to cash in on share price rises during the last two weeks.

"You would be amiss if you didn't take a little something here to protect yourself," said Anthony Iuliano, chief trader at Glenmede Trust Co.

In Europe, the markets had a better day, with London's FTSE 100 index closing up 2.4% at 4,104 on the back of gains in heavyweight financial and telecoms stocks.

Frankfurt's Dax settled 2.3% higher at 3,015, while in Paris, the blue-chip Cac index closed up 2.7% at 3,075.