Yesterday's diplomatic deadlock in Geneva, watched around the globe on television, chilled hopes for quick settlement of the Persian Gulf crisis and brought new fears of war.

Financial markets, which at midday had been betting on a peaceful solution to the gulf crisis, went on a wild ride after Secretary of State James A. Baker III announced that the talks with his Iraqi counterpart had been unsuccessful. The Dow Jones industrial average, which had been up more than 40 points, closed down 39.11.

In Saudi Arabia, U.S. Marines and British forces have moved northward in anticipation of an offensive against Iraqi troops, but three U.S. Army tank divisions still are not fully deployed, casting some doubts on U.S. readiness for battle.

Dismayed Saudis, Egyptians and Kuwaitis criticized Iraqi President Saddam Hussein for his refusal to budge and said that war was increasingly likely.

Growing tension was evident in Baghdad, where there were long lines at gas pumps and new discussion by foreign diplomats of fleeing the city before the Jan. 15 U.N. deadline. Saddam underlined the mood of confrontation by saying of U.S. forces, "We will make them swim in their own blood."

The grim business of war was also evident at a bedsheet factory in Philadelphia that is busy filling a new rush order: 16,099 body bags for U.S. soldiers who may die in Operation Desert Shield.