LONDON, Feb 6: World stock markets and the dollar recoiled on Thursday while oil prices rose, after US Secretary of State Colin Powell failed to persuade skeptical allies of the need for war in Iraq, leaving investors on tenterhooks.

The United Nations’ top arms inspectors meanwhile urged Iraq to show a “drastic change” of attitude and cooperate fully as time runs out to avert a looming war, even as Britain has deployed 100 aircraft to the Gulf.

European markets fell heavily — in tandem with US and Asian shares — despite a decision by the Bank of England to cut interest rates to their lowest level for almost half a century because of the weak global economic outlook.

On the region’s biggest market in London, the FTSE 100 blue-chip index slumped 2.2 per cent to close at 3,597 points, heading back towards a seven-year low seen in January.

US stock markets also trudged lower in early trading.

Dealers said that North Korea’s announcement that it has restarted a controversial nuclear reactor and threatened a possible pre-emptive strike if Washington beefs up its forces in the region had added to geopolitical tensions.

The Dow Jones industrial average slipped 65.07 points (0.81 per cent) to 7,920.11 and the Nasdaq composite drifted down 1.06 points (0.08 per cent) to 1,300.44 at 1607 GMT.

The Standard and Poor’s 500 declined 7.35 points (0.87 per cent) to 836.24.

Even figures showing that US productivity — or output for each hour worked — had surged by an annual average of 4.7 per cent in 2002 the strongest performance since 1950.

The data failed to boost the US currency, pushing the euro up to 1.0839 dollars from 1.0778 late on Wednesday.

Oil prices also rose on worries about the prospect of war and on sharp recent falls in US oil stock levels, particularly distillate fuel inventories.

The price of benchmark Brent North Sea crude oil for March delivery rose 26 cents a barrel to 31.62 dollars in late trading here.

Asian share markets had also eased earlier in the day. Stocks lost 0.8 percent in Tokyo and 0.6 percent in Hong Kong.

Markets fared even worse in Europe despite the British central bank’s decision to slice its main lending rate by 0.25 percentage points to 3.75 percent.

BNP Paribas equity strategist David Thwaites said the decision was “a complete surprise.”

“You have to ask now why are they cutting rates. I think the markets will worry about what the implications are in terms of growth,” he added.

The European Central Bank announced shortly afterwards it was leaving its main lending rate unchanged at 2.75 per cent.

The DJ Stoxx 50 index of leading euro-zone shares fell 2.6 per cent to 2,168.6 points.

Other regional markets followed London lower. The German DAX 30 index tumbled 3.0 percent to 2,644.5 points in late trade.—AFP