With the U.S.-led march to Baghdad looking considerably less triumphant than it did at first, the specter of a messy war inflicting a grave blow on the global economy is looming anew.

That was the message delivered yesterday by financial markets, especially in the United States and Europe, which reversed some of the big gains posted last week. Oil prices surged for the first time in eight trading days and the Dow Jones industrial average fell 307.29 points, or 3.6 percent, to close at 8214.68. Most European markets lost even more in percentage terms, with the Paris CAC 40 shedding 5.7 percent and the German Dax index declining 6.1 percent.

Although those stock market losses followed huge run-ups -- the Dow posted its biggest weekly gain, 8.4 percent, in 20 years -- they underscored the risks that the war presents to the world economic outlook, analysts said.

"It's not that the outcome of the war is in doubt, but if the war is going to be more difficult, the peace that follows is probably going to be more difficult," said William C. Dudley, chief U.S. economist at Goldman Sachs & Co.

That could mean, first of all, that businesses and consumers will continue the hesitation about spending that has dampened economic growth in recent months. "Geopolitical uncertainties will be with us for a while longer," Dudley said.

More important, it could mean that "the peace will be more expensive," significantly raising the prospective cost to the U.S. government of maintaining control in Iraq. "The Iraqis seem a lot more undecided than people had thought they would about whether our coming in is good or bad, which suggests that imposing democracy is also going to be difficult," Dudley said.

It would be misleading to conclude from yesterday's market setbacks that the global economy is suddenly in great peril, analysts cautioned, just as it would have been misleading to interpret last week's powerful rallies as an indication that all the clouds have lifted. The rallies had seemed to "price in" expectations about a near-perfect war, so some retreat from lofty levels was bound to materialize as soon as the first glitches surfaced in the Pentagon's battle plans.

Furthermore, the evidence to date suggests that some of the most nightmarish scenarios about the war's impact on oil supplies -- at least the ones involving the destruction of Iraq's vast petroleum reserves by Saddam Hussein's forces -- can probably be dismissed.

"It seems that the Basra oil fields are under some kind of control; they're not all ablaze," said Joel Prakken, chairman of Macroeconomic Advisers LLC, a St. Louis forecasting firm. He referred to the key petroleum facilities in southern Iraq. "And what's going on in the north is a little less clear, but those fields aren't all ablaze, either."

Prakken, who had anticipated that crude oil prices would climb with the start of the war and average $40 a barrel in April, said that energy costs will almost certainly pose less of a problem for inflation and growth than many had feared. As a result, he said, he feels more confident about the outlook and this week his firm may even revise upward its forecast for 2 percent U.S. annual growth in the first half of 2003 and 4 percent in the second half.

Still, yesterday's market activity "shows that we're not out of the woods yet," said Kim Schoenholtz, chief economist for Citigroup Inc. "We're not out of the woods until it's clear that there is no sustained damage to oil-production facilities, until we find out whether other regimes in the Middle East have been undermined, and whether we experience a renewed terrorist threat."

Schoenholtz noted that an exercise conducted by the Center for Strategic and International Studies in Washington found that the impact of the war on the global economy would vary tremendously depending on how the conflict proceeded. Under a "benign" scenario, in which the U.S.-led invasion encountered little resistance and Iraqi oil reserves were left largely unscathed, the conflict would actually provide economic benefits, partly in the form of a major boost to confidence. But under the worst-case scenario, in which oil fields were torched and unrest spread throughout the Arab world, oil prices would shoot up to $80 a barrel and the world economy would plummet into recession.

"It's not surprising that we have volatility in the markets as more information comes in about the war's progress, because it's so critical to the global economy," Schoenholtz said. "Until the fog of war has settled, and we have clarity about what the peace is like, you can expect very high levels of volatility."

Nearly everything that went up last week went down yesterday, and vice versa.

The U.S. dollar, which hit two-month highs on Friday against the euro and the Swiss franc, tumbled against both currencies. U.S. government bonds, a traditional safe-haven investment, recorded their biggest gain in four months; last week, investors had unloaded bonds as they poured money into stocks. The yield on the benchmark 10-year Treasury note, which moves inversely with its price, dipped below 4 percent.

The Standard and Poor's 500-stock index fell 31.67 points, or 3.5 percent, to close at 864.23, and the Nasdaq composite index dropped 52.06 points, or 3.6 percent, to close at 1369.78. In both American and European markets, the biggest losers were companies that are bound to suffer from higher oil prices and a drop-off in travel, including AMR Corp., the parent of American Airlines; British Airways PLC; and Club Mediterranee SA.

Japan's stock market rose, but it was closed on Friday for a national holiday and was thus catching up to some extent with the gains posted in other markets late last week. The Nikkei 225 index climbed 2.93 percent.

The most consequential market developments may be in Turkey, where bonds, stocks and the nation's currency all continued a precipitous fall that began picking up momentum two weeks ago when the rift between Washington and Ankara widened. The country's benchmark dollar bond, due in 2030, dropped 5.75 points on the dollar to 81.5 cents, its sixth decline in the past seven trading days. At those levels, investors are clearly demonstrating nervousness about a default, analysts said.

Ankara has long depended on support from Washington for international aid, but the Turks' reluctance to cooperate in the war effort has already led U.S. officials to withdraw a $6 billion aid package, and market participants suspect that U.S. backing for International Monetary Fund loans will be much more tepid than in the past.

"Turkey is chronically addicted to IMF money, and without IMF money, it's certainly game over," said Christian Stracke, head of emerging-markets research at CreditSights, an independent research firm. The United States has always backed Ankara to the hilt because of Turkey's strategic importance, but now the once-unthinkable prospect of a Turkish economic collapse is mounting.

If Turkey is forced to suspend payment on its debt, that would result in a severe contraction of credit in an economy that is already facing the likelihood of a substantial decline in tourism. Alternatively, the government could decide to print money to pay its debts, "but that would also be bad for the economy, because they have been trying to put their past of hyperinflation behind them," Stracke said.

Other Indicators

* The Nasdaq composite index fell 52.06, to 1369.78; the Standard & Poor's 500-stock index fell 31.56, to 864.23; the New York Stock Exchange composite index fell 169.36, to 4801.58; the American Stock Exchange index fell 8.08, to 817.45; and the Russell 2000 index of smaller-company stocks fell 8.99, to 367.25.

* Declining issues outnumbered advancing ones by 7 to 2 on the NYSE, where trading volume fell to 1.28 billion shares, from 1.81 billion on Friday. On the Nasdaq Stock Market, decliners outnumbered advancers by 3 to 1 and volume totaled 1.31 billion, down from 1.84 billion.

* The price of the Treasury's 10-year note rose $8.44 per $1,000 invested, and its yield fell to 3.97 percent, from 4.07 percent on Friday.

* The dollar fell against the Japanese yen and the euro. In late New York trading, a dollar bought 120.73 yen, down from 121.51 late Friday, and a euro bought $1.0644, up from $1.0534.

* Light, sweet crude oil for May delivery settled at $28.66, up $1.75, on the New York Mercantile Exchange.

* Gold for current delivery rose to $329.50 a troy ounce, from $326.00 on Friday, on the New York Mercantile Exchange's Commodity Exchange.

The news was grim on the floor of the New York Stock Exchange yesterday: The Dow Jones industrial average lost its gains from Friday.