Reports of intensified fighting in Iraq have sent stock markets sharply lower and oil prices higher.
Oil markets have taken news of burning Iraqi wells in their stride
The dollar, which has gained strongly against the euro in the past few days, also took a tumble, as investors feared that coalition forces could be in for a more expensive war than initially hoped.
"The war is not a cakewalk and this will sober up some of
the traders betting on a quick recovery," said Alan Ackerman at Fahnestock & Co.
"The fighting on the ground could be very nasty and could be
unpredictable and could take longer than many expected."
In New York, the Dow Jones index of leading US shares closed down 307 points, or 3.6%, at 8,214.
Earlier, the FTSE 100 index of leading UK shares closed down 3.1% at 3,743.
European shares performed even more poorly, with France's Cac 40 closing down 5.7%, and the Frankfurt Dax and Dutch AEX indexes both down by more than 6%.
The oil market has been behaving as if peace has broken out
Adam Sieminski, Deutsche Bank
The falls followed substantial rises last week when investors reacted positively to the ending of uncertainty over war and early signs that the conflict might prove short-lived.
Oil prices rose $1.70 to $26 a barrel in after-hours trading in London.
"The oil market has been behaving as if peace has broken out but the level of Iraqi resistance so far suggests the war could drag on, with consequences for oil prices," said Adam Sieminski, an oil analyst at Deutsche Bank.
Oil traders were also reacting to news that more than 30% of Nigeria's output has been shut down because of ethnic warfare.
"My guess is that Brent [the London benchmark crude oil] will hold at this level until we get a
clearer picture of where the [Iraq] war is going to go," said Barclays
Capital analyst Orrin Middleton.
"I still think that when Saddam [Hussein] is out of the way, we will see
new lows, around $22 for Brent."
Seeking safe havens
The dollar, an indicator of market confidence in the US economy, also stumbled as the Dow fell.
The greenback fell by more than 1% against the euro, to $1.0643 - reversing a rally that has seen it gain almost four cents in a couple of weeks.
In the search for safe havens, investors also poured their money into Swiss francs and gold, which jumped by $4 a tonne.