LONDON, 19 March 2003 — Fears about how a looming war in Iraq will unfold tempered new-found optimism on world stock markets yesterday, though oil prices plunged as concerns about a possible supply shortfall waned.

The broad Standard and Poor’s 500, virtually flat ahead of the Fed decision, was last off 3.17 points, or 0.37 percent, to 859.62. The tech-laced NASDAQ Composite Index shed 4.30 points, or 0.31 percent, to 1,387.97. The blue-chip Dow Jones Industrial Average, up a little earlier, lost 2.24 points, or 0.03 percent, to 8,139.68 after the Fed decision.

The US central bank held rates at 1961 lows, as expected, but signaled it was ready to cut them quickly if an Iraqi war takes an economic toll by saying it would practice “heightened surveillance.”

Traders were digesting Monday’s powerful rally, with some analysts casting doubt on whether the size of the rebound was justified.

“It is said that the stock market exists to make fools out of the greatest number people,” said Morgan Stanley economist Byron Wien.

After making headway in early trading, most European stock markets erased all or the bulk of their gains after the powerful recent rally on Wall Street lost steam.

The British FTSE 100 index closed up 0.7 percent at 3,747.3 points, the French CAC 40 index fell 1.3 percent to end at 2,794.9 points, though the German DAX 30 was ahead 3.8 percent at 2,581.3 points in late deals.

The strong performance by German shares helped the DJ Euro Stoxx 50 index of leading euro-zone shares gain 2.0 percent to 2,182.5 points in late trading.

A sharp fall in oil prices helped to brighten the mood among investors nervous about the impact on the global economy and company earnings of the recent surge in crude prices.

The price of reference Brent North Sea crude oil for May delivery plunged $1.73 here to $27.75 per barrel in late deals, off earlier lows.

“The market is collapsing because people feel it’s going to be a very quick war,” said GNI trader Robert Laughlin.

US crude futures fell $3.53 to a two-month low of $31.40 per barrel, before closing at $31.60.

The dollar resumed its upswing against other leading currencies, though it also struggled to sustain momentum, in line with US stocks.

The euro fell to as low as 1.0544 dollars before recovering to 1.0623 dollars, against 1.0621 dollars late on Monday in New York. The dollar rose to 118.91 yen from 118.50 on Monday.

The price of gold slipped to $338.00 per ounce on the London Bullion Market from $340.75 late on Monday.

Earlier in Asia, stock markets streaker higher, playing catch-up with Monday’s rally in Europe and New York. Japanese share prices posted a modest rise but Seoul was up 4.28 percent, Taipei up 4.17 percent and Sydney up 3.50 percent.

The Nikkei-225 average of the Tokyo Stock Exchange advanced 82.82 points to end at 7,954.46, off a high of 8,081.17.

The broader Topix index of all first section issues finished up 6.35 points at 783.56.

In Hong Kong, the key Hang Seng index gained 237.35 points to close at 9,041.51.

In Sydney, the benchmark SP ASX 200 index rose 96.0 points, closing at 2,835.1 and the All Ordinaries index rose 93.4 points, or 3.45 percent, to 2,804.4 in its biggest rally since October, 1997.

In Singapore, the Straits Times Index closed 39.70 points higher at 1,274.12 and the All-Singapore Equities index was 9.20 points up at 342.93.

In Seoul, the composite index closed up 22.07 points at 537.31, with many investors pinning hopes on any hostilities in Iraq being swift.