Investors seemed to be betting that the war with Iraq would quickly end in the United States' favour.

The Dow Jones finished up 21 points at 8,287 but the rise came only after the US stepped up its attacks in the Gulf.

Earlier the mood had been downbeat with shares down 134 points. That was enough to drag European markets down after they had been trading moderately higher for most of Thursday morning.

War rally

In London the FTSE 100 closed up just 0.3 of a point at 3,765.7 while the Cac 40 in Paris closed 1.5% lower at 2,794.8. In Germany the Dax was down 0.4% at 2,605.

"It is our belief that the market will rally further because we subscribe to the view that this will be a short war, but then we probably need some consolidation, and maybe even some weakness," said Nigel Cobby, managing director of European equities at JP Morgan in London.

Uncertainty is what stock markets most dislike Q&A: Why are stock markets rising in times of war?

But investors were unnerved by comments from US President George W Bush late on Wednesday, in which he warned against assumptions of an easy victory for the US-led troops.

"That is really the overriding issue because stock markets had anticipated or factored in a quick conflict," said Jeremy Batstone, head of research at NatWest Stockbrokers.

Stock markets around the world have been rising sharply since late last week as military conflict appeared to become inevitable - in an echo of the "war rally" experienced during the Gulf War in 1991.

Asian gains

Earlier on Thursday, Asian markets posted strong gains.

Tokyo's Nikkei index gained 1.8% or 144 points to close at 8,195 - although the market experienced hefty swings during the session.

The Hang Seng index in Hong Kong initially gained more than 120 points, or 1.3%, only to lose all of that later in the session.

It managed to close with a 0.4% gain at 9,195 points.