World stock markets fall sharply

US investors started the week in gloomy mood

Major world stock markets have dropped sharply after Israel's killing of a leading Palestinian militant and amid concern at political tension in Taiwan.

Analysts said investors were also acting on indications that the pace of global economic recovery was slowing.

These worries sapped the dollar further against all major currencies except the Japanese yen.

New York's Dow Jones index closed on Monday 1.2% lower, while Europe's main markets closed down 2-3%.

Political fears

In the US, the day's trading dragged the Dow Jones Industrial Average and technology stocks Nasdaq index to close at their worst lows this year.

Monday began with Asian markets being pummelled by uncertainty over Taiwan's disputed election result.

Then an Israeli missile killed Sheik Ahmed Yassin as he emerged from morning prayers in Gaza City. Hamas, the militant Palestinian group he led, included the US in its promise of retaliation.

"There's no question that there is a broad range of geopolitical concerns, whether it's Israel, Taiwan, Iraq or Spain," said Hugh Johnson, chief investment officer at First Albany Corp.

"The world is clearly a very unsettled and dangerous place, and that's demoralising to investors."

"There's concern about what's going on all over the world with regard to terrorist activities," said Bill Strazzullo, vice president of State Street Global Markets.

Nervous investors knocked 1.9% off London's blue-chip FTSE 100 stocks index on Monday.

Frankfurt's leading Dax 30 share index shed 2.3%, while in Paris the Cac 40 lost 2%.

The first anniversary of the start of the Iraq war at the weekend, and unease stirred by the Madrid bombings contributed to the anxious mood among European investors.

Mark McCutcheon of stockbrokers Gerrard said warnings from London's top police officer last week had brought the risk of attack "close to home".

Airline stocks suffered; British Airways was the heaviest faller on the FTSE 100, while Continental and American Airlines parent firm AMR Corp both declined after an industry report showing Americans remain reluctant to fly.

Investors were also worried by the lacklustre global recovery.

Mr Johnson said investors were becoming more worried that company earnings and wider economic performance would fall short of forecasts.

High oil prices and a disappointingly weak US jobs market were factors in this, he said.

Hi-tech Taiwan

East Asian markets were unsettled by worries over Taiwan's political prospects as protestors questioned the legitimacy of President Chen Shui-bian's wafer-thin electoral victory and the opposition asked the courts for a recount.

Taiwan's hi tech industries are global players, and it is home to the world's two biggest computer memory chip foundries.

New York listed shares in one of them, Taiwan Semiconductor Manufacturing Co (TSMC) plunged nearly 8% in late trade on Monday.

Falls on Taiwan's stock market were mirrored in Hong Kong and Japan.