It's been a wobbly day of trade

Prices were choppy and volume was thin after it was reported US-led forces had moved into the demilitarised zone on the Iraq-Kuwait border.

In Europe, stocks recovered from a negative start and London's FTSE closed 18 points higher at 3,765.

Frankfurt's DAX index closed 30.6 or 1.2% higher at 2,615.22 points, while Paris' Cac ended 42.79 or 1.53% higher at 2,837.7 points.

In New York, the Dow Jones industrial average gained 71.9 points, or 0.88%, to close 8,266.1.

Alfred Goldman, at brokers AG Edwards, in New York, said: "Investors are cautious as war appears imminent.

"There have been rumors that important Baghdad officials have defected but none have proven to be true."

Strong recovery

The London market has clocked up four consecutive days of gains.

European markets have rallied strongly since hitting multi-year lows last Wednesday with dealers saying the markets are now counting on a short war.

The pre-war rally had prompted a high level of activity from day traders.

But market watchers say few traders are prepared to take long-term gambles on the market's direction in the present uncertain climate.

The markets are counting down to US president George W Bush's ultimatum to Iraqi president Saddam Hussein to leave the country by 0100 GMT on Thursday or face the consequences of an American-led attack.

Federal Reserve

On Tuesday, the Federal Reserve in the US had left interest rates unchanged at a 41-year low of 1.25%.

But it said it would cut rates quickly if a war in Iraq proved economically damaging.

Because of the Iraq situation, the Fed did not release its regular estimate of the risks facing the US economy and said it would practice "heightened surveillance".