The "war rally" on world stock markets has began to run out of steam as hopes for a short war in Iraq dissipated with fund managers braced for further volatility, writes  Siobhán Creaton, Finance Correspondent

Oil prices slumped yesterday while the dollar strengthened as investors continued to weigh up the consequences of war.

In New York, the Dow gained for a fifth straight day as a carry-through rally on hopes war in Iraq will be quick was held back by worries over a weak economy.

"The fact that the Fed did not change the bias is somewhat positive. But I think the market is having a reality check," said Mr Peter Cardillo, chief strategist at Global Partners Securities.

"We have come up sharply on the pretense that we will have a short war but we are not engaged in war just yet.

"Once the bombs start to fall the progress of the war will be noted."

The Dow Jones industrial average gained 52.31 points, or 0.64 per cent, to close 8,194.23,

The technology-laced Nasdaq Composite Index added 8.26 points, or 0.59 per cent, to finish at 1,400.53.

In Dublin, Irish share prices were higher catching up on the rally in Europe on Monday.

The ISEQ Index closed 1.44 per cent higher at 3,952.61. In Britain, the FTSE 100 index made gains but finished well below session highs as investors skimmed profits from the storming rebound from the eight-year low reached last week.

In Europe the FTSE Eurotop 300 index was down 0.2 of a percentage point at 778.07, still some 14 per cent off six-year lows reached last week.

Analysts suggest that while investors were initially relieved that much of the uncertainty that had driven equity markets lower had been removed this week they are now facing fresh uncertainty about the war.

Mr Robbie Kelleher, head of research at Davy Stockbrokers, believes that even if the conflict is successfully resolved in the short-term that economic fundamantals will not support a sustained stock market rally.

"There is a war rally at the moment which may go further but it is difficult to put a number on it but there are still fundamental concerns about markets independent of Iraq."

Mr Kelleher believes the world economy is now looking at a couple of years of sub-par growth.

"The global economy has been totally dependent on the US for the past few years. The US can't continue to support that and there is no other candidate," he said.

"Equities are not particularly cheap at the moment. There is a rally but stocks will fall back again," according to Mr Kelleher.

Dr Dan McLaughlin, chief economist with Bank of Ireland, says that the markets are anticipating a short and successful war and that there will be no damage to Iraq's oil wells but there is a risk that this would not be the outcome.

He also remains cautious, arguing the economic fundamentals could unwind the short-term gains for investors.

Oil prices tumbled sharply yesterday as a swift war was factored in by the markets.

"The oil price has had its most severe drop in years. Meanwhile people are starting to wonder if this quick war scenario we are all anticipating is realistic, so we are seeing huge swings between asset classes," said Mr Lex Werkheim, fund manager at Eureffect in Amsterdam.

"The drop in crude oil prices hit oil stocks while the insurance industry also suffered as investors took money out of the sector.

- (Additional reporting by Reuters)