NEW YORK, AUG. 6 -- The Persian Gulf crisis inflicted its worst damage yet on world financial markets today, as the risk of stepped-up hostilities sent oil prices soaring by more than $3 a barrel and triggered the sharpest one-day decline in U.S. stock prices in nearly 10 months.

The Dow Jones industrial average plummeted 105 points in the first 45 minutes of trading, as the American markets followed the pattern set by sharp losses earlier in the day in the Japanese and Western European markets.

The Dow closed at 2716.34, down 93.31 points, or 3.3 percent. The drop was the biggest since last October's "mini-crash," and left the average of blue-chip stocks at its lowest level since May and down more than 173 points since the crisis began last week.

{In Tokyo at the Tuesday morning session, the Nikkei average of 225 stocks fell 1,327 points, or 4.64 percent, to 27,271.86. It fell 916.23 points, or 3.1 percent, to 28,599.53 on Monday.}

Today's decline at the New York Stock Exchange triggered "circuit breakers" that slowed computer-driven program trading and moderated the price drop.

Shares of smaller U.S. companies also fared poorly, as the over-the-counter market suffered its worst day since the "Black Monday" crash of Oct. 19, 1987. The Nasdaq composite index fell 17.42 points, or 4.2 percent, to 400.04.

The rout reflected investors' sour mood when they returned to work after a weekend during which Iraq broke its promise to begin withdrawing troops on Sunday from Kuwait. The markets also were nervous over the prospect that the United States and other Western nations might confront Iraq militarily, and over the impact on oil prices of a planned, widespread boycott of Iraqi and Kuwaiti crude.

"Everything went wrong today. The prospect of some stabilization of the situation in the Middle East diminished. There's a feeling that {President} Bush will respond militarily," said Byron R. Wien, chief U.S. investment strategist for Morgan Stanley.

Although Wien and other analysts said the market is nervous over the prospect of U.S. military activity against Iraq, they said that they believed that a successful military operation against Iraqi dictator Saddam Hussein would bolster stock prices.

"If he {Saddam} were stopped in some way, using military force, it would be viewed as bullish for the market and a positive for Bush," Wien said. "If they don't stop him, he will hang as a cloud over the market. You can't have oil, the most vital material in American life, in the hands of an unpredictable leader."

The impact of the Middle Eastern political turmoil was felt most strongly in the oil markets, where today's one-day price increase exceeded the combined sharp gain registered last Thursday and Friday in the immediate wake of Iraq's seizure of Kuwait.

The benchmark, free-market price for oil, which is the price for delivery in September of West Texas Intermediate crude, skyrocketed by $3.56 to $28.05 for a 42-gallon barrel in New York trading.

The price rose so sharply because of the worsened political outlook over the weekend in the Persian Gulf, traders said.

"We know much more about the situation today. We know that the Iraqis are in Kuwait for a long time. We know the embargo {on Iraqi oil} has been accepted by the Japanese. The amount of oil that is going to come to Western countries is going to be severely reduced," said Reynold A. Burrowes, an oil trading analyst for Dean Witter Reynolds Inc.

The rise in oil prices was good news for oil company stocks, which continued to surge and kept the broad decline in stock prices from being even steeper. Exxon was up 1 1/8 to 54 1/4 and Chevron was up 5/8 to 79 3/8. The prospect of military action in the gulf also helped some defense industry stocks and gold mining shares. The price of gold, a traditional refuge for investors during times of political jitters, rose more than $7 an ounce to $384.70.

In general, however, the rise in oil prices was viewed as a strongly negative factor for stocks, especially because it adds to inflation at a time when economic growth has slowed and profits are down.

"What oil prices have done is shock investors into a realization that inflation was not subsiding, but in fact could be a real problem, against a backdrop of declining corporate profits," said Kenneth M. Spence, director of technical analysis at Salomon Brothers Inc.

Investors in foreign stock markets reached similar conclusions. In London, the FTSE-100 index lost 2.8 percent, declining to 2,220.2 from 2,284.6.

The dollar, which had risen last week as investors sought a "safe haven" for their funds, turned mixed owing to worries that the U.S. economy may be on the verge of a recession. The U.S. currency dropped to 1.5788 West German marks this afternoon, from 1.5935 on Friday.

The dollar continued to climb against the Japanese yen, however, owing to the view that the Japanese economy is particularly vulnerable to higher oil prices. The dollar was quoted at 150.35 yen, up from 149.93 on Friday.

There were some major market reactions that were not driven by the Persian Gulf. Already pushed down by miserable earnings or forecasts issued recently by such companies as Digital Equipment Corp. and Apple Computer Inc., computer industry stocks suffered another blow today with the surprise announcement by Businessland Inc., the international computer retailer, that it lost $23 million on $1.3 billion in sales for the year ended June 30. Businessland's stock plunged more than 50 percent to 2 7/8.

"In percentage terms, it's probably the worst I've ever seen," said Michael Murphy, who follows West Coast stocks as editor of the California Technology Stock Letter. Businessland, which also reported it is in violation of certain terms related to its debt, said "accounting errors" forced it to increase the losses reported in earlier quarters.

It was another heavy trading day across markets. On the Big Board, trading volume was heavy at about 240 million shares. While that figure was down from 292 million on Friday, it was still the third-highest total this year.

Among other market indexes, the Standard & Poor's 500-stock index dropped 10.43 to 334.43, and the New York Stock Exchange composite index fell 5.50 to 183.32. The American Stock Exchange index dropped 6.36 to 340.27.

The Securities and Exchange Commission has maintained close touch with other regulators and with the heads of stock markets and major Wall Street investment firms in recent days, according to government and industry officials.

According to congressional aides familiar with financial service markets, banking and securities regulators view the stock markets downturn as an orderly one based on bad economic news. For that reason, government intervention in the markets seems unlikely, they said.

By contrast, the October downturns in 1987 and 1989 were disorderly, prompting public assurances from the Federal Reserve Board and other regulators that the government stood ready to take whatever measures were needed to prevent a breakdown in the nation's financial system, sources said.