Leading shares in European and US markets have clawed back some of their losses after fears of imminent war sparked a day of volatile trading.

There is a filthy stench, an aroma of fear and uncertainty David Buik Cantor Index

Share prices fell sharply across the world after the US President George W Bush signalled, on Tuesday evening, that war with Iraq was close.

The FTSE 100 index of blue-chip shares dipped below the 3,400 level just over an hour after trading began on Wednesday, but by the end of the day it was just 6 points lower at 3,484.

Traders said the market was being driven by concerns about whether or not the US was about to go to war.

"There is a filthy stench, an aroma of fear and uncertainty," said David Buik from the spread-betting company Cantor Index.

Clawing back

The Paris and Frankfurt stock markets had also experienced heavy falls during the day, but managed to make up their losses.

If you believe that there are catastrophic events ahead of us then we are heading for a greater dip David Schwartz, Stock market historian

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In Paris, the Cac closed up 1.4% or 40 points at 2,840 while the German Dax was 36 points higher at 2,706.

New York's Dow Jones index also pulled back from earlier losses to end the day up 21 points at 8,110 points following the Federal Reserve's decision to leave interest rates on hold.

Earlier Asian markets had taken fright and fallen in response to the US President's comments about Iraq.

World markets have been nervous about the impact of a US-led war against terror on the fragile global economy for months.

Impact on spending

Economists are particularly concerned about the effect of a war on consumer spending - which has been a key support to struggling economies in both the US and the UK.

They hope the Fed's decision to leave borrowing rates at the 41-year low of 1.25% could push investors and businesses to resume spending.

But dealers said the President's state of the nation address was still weighing heavily on investor sentiment.

"Obviously the President has prepared the nation and the world for war and this is being discounted on the market," said Peter Cardillo, chief strategist at Global Partners Securities.