The U.S. dollar was hit badly in late trading in New York yesterday after Kuwait recommended that Arab nations "cease to invest in dollar markets" in retaliation for the Israeli bombing on Iraq. Gold dropped to its lowest level in a year and a half in London.

The reports first hit foreign exchange markets in late afternoon in New York. "Everyone panicked initially since no one knew the actual nature of the threat," a New York bank trader said, although he said the dollar began to steady after the first bout of selling.

There was little reaction on gold markets, which officially were closed when the Kuwaiti reports came in.

In Zurich, where markets were closed Monday, gold closed at $461.60 an ounce. In London gold closed at $456.50 an ounce -- its lowest price since December 1979 in London and down from $472.50 Monday.

In New York gold closed at $459.50, down from $462.50, and it settled on the New York Commodity Exchange at $459.10, down from $462.40. Silver fell to $9.98, down from $10.15.

After showing substantial gains inearly trading, the British pound fell back in London to $1.90405 from Monday's $1.9410, then it rose to $1.9550 in New York.