Stock prices in New York yesterday posted the second-biggest gain in history and crude oil prices plunged by one-third to the lowest level since the Aug. 2 invasion of Kuwait. But an Iraqi attack on Israel last night punctured traders' euphoria on foreign markets with a reminder that the crisis is not over.

In the initial flush of optimism following the first allied assault on Iraq, the Dow Jones industrial average soared.

The index gained more than 100 points in the first hour of trading, then leveled off, finishing up 114.61 points in heavy trading as 318.9 million shares changed hands.

But three hours after Wall Street's markets closed, the Iraqi missile attack jolted traders in Tokyo, where a strong early rally in the stock market turned into a rout. Just as suddenly, the market steadied and ended the trading session this morning up 229.58 points, or about 0.9 percent. In Tokyo today, the Nikkei average closed up 361.49 points, or 1.54 percent. {Details on Page F1.}

Traders in Tokyo quickly concluded that despite the raid on Israel, "the multinational forces still have the upper hand," said Toshiyuki Nishiguchi, deputy general manager of the equity department at Daiwa Securities.

But Tokyo markets still reflected unease. The dollar, traditionally a safe haven for nervous investors, jumped by just under 1 yen, to 133.53 yen. Oil prices in Tokyo rebounded initially from opening losses. The news of the Iraqi attack drove futures contracts for North Sea Brent crude oil higher, but prices soon settled back, closing the day at $19.70 a barrel for a contract on March delivery, just 20 cents above Thursday's close in New York.

Earlier, oil prices in New York had dropped a record $10.56 a barrel, closing at $21.44 yesterday on the New York Mercantile Exchange, where contracts for future delivery of oil are traded. "The oil market decided the war was over," said Daniel Yergin, author of a recent book on oil power titled "The Prize." "Whether the war is actually over is still to be tested and proved, but this shows the powerful role of psychology."

"This market has been driven by psychology since Aug. 2 rather than supply and demand and as a result you've had these movements in the price of oil that are like earthquakes moving through the entire economy," Yergin said before Iraqi missiles hit Israel.

The huge price decline in New York, in a matter of hours, erased $40 billion from the value of the world's 4 billion barrel inventory of oil held in tanks and tankers outside the war zone. Several major oil companies cut posted prices for gasoline and heating oil. Exxon Corp., the nation's biggest oil company, cut its wholesale price for a gallon of heating oil by 10 cents, and analysts said the reductions, if sustained, would begin showing up soon in prices for gasoline and fuel oil.

"Every war will astonish you, but this war in particular has astonished everyone in how quick and decisive it has been, at least in the initial stages," said Robert D. Hormats, vice chairman of Goldman Sachs International in New York and a former State Department official. "It's the lifting of the war risk from the markets in oil, stocks and bonds."

Analysts warned, however, that new developments in the gulf could cause markets to retreat. Reports that missiles had exploded last night in Tel Aviv could rock markets today.

Because of the eight-hour time difference between Iraq and New York, the first stage of the allied attack could not have been better orchestrated for financial markets in the United States.

American and allied planes took off to attack Iraq less than an hour after financial markets closed Wednesday in New York. The chairman of the Joint Chiefs of Staff, Lt. Gen. Colin L. Powell, yesterday finished briefing reporters on his upbeat assessment of the first night of war just moments before the opening bell at the New York Stock Exchange.

William Donaldson, chairman of the New York exchange, said the opening bell signaled a minute of silent prayer for the soldiers taking part in Operation Desert Storm. A second bell signaled the start of 59 minutes of frenzied trading. In that time, the Dow index jumped 97.52 points and 107.7 million shares changed hands.

After that, stock prices eased, perhaps to reflect the recognition that half a million Iraqi troops are still sitting atop one of the world's biggest reservoirs of crude oil.

"In the Middle East, anything can happen," Hormats warned, citing the specter of Iraqi-sponsored terrorism or a "surge in anti-American passions." He said "the markets can turn on a dime. I think it's a little too early to get carried away."

Yergin said, "What happens to oil will over the next week or two almost entirely depend on the course of battle.".

If war fears were to begin to fade, economic factors would become predominant. That might further push down the price of oil because of overflowing world inventories and crude oil production by the Organization of Petroleum Exporting Countries that exceed levels reported before the invasion of Kuwait. "This has been a tug of war between psychology on one side and supply fundamentals on the other," Yergin said.

But concerns would still linger about the economy's other ills. The nation's economy was in a slump even before the Iraqi invasion of Kuwait. The nation's banks are in shaky condition and economic indicators have shown no sign of the recession easing.

One indication of those concerns yesterday was the fall in the value of the U.S. dollar against other currencies. During times of crisis, money seeking a safe haven usually flows into the U.S. currency. But as the perception of danger faded, the dollar fell.

Traders said an early end of the war would mean the resumption of a focus on the underlying problems of the American economy: recession, a budget deficit exacerbated by the cost of the gulf war, a big trade deficit and weaknesses in the banking system. These problems along with the global economic outlook will be discussed at a top-level meeting in New York on Sunday and Monday among the finance ministers of the seven richest nations.

A senior Bush administration official yesterday hailed the market movements, which took place with relatively little intervention.

"It's the market that's been operating," the official said. "We have enormous global markets that are hugely efficient and are able to conduct and absorb huge transactions."

Others, however, were less sanguine. "Clearly this is not about quarterly earnings," said Lew Glucksman, vice chairman and head of the capital markets division of Smith Barney, Harris Upham & Co. in New York. "If we had lost a carrier, we would be down 300 points today."

Staff writers Thomas W. Lippman, Robert J. McCartney and Hobart Rowen contributed to this report.