New incidents of violence in the Middle East have blown the cloud of geopolitical turmoil back over Wall Street, unsettling investors who had been lulled for weeks by rosy economic news.

Stock markets around the globe were sent reeling on Monday on fears of further bloodshed after a weekend that saw deadly attacks on two Istanbul synagogues and a purported statement from al Qaeda threatening more suicide bombings against the United States and its allies.

"It certainly increases the market's anxiety that this is still a very real threat worldwide," said Peter Gottlieb, president of Gottlieb Investment Management Corp. "The terrorist attacks outside of Iraq just remind us Iraq is not the only place we're going to be hearing news like this in the future. It can be anywhere and at any time."

Japanese stocks plunged nearly 4 percent, European shares closed at two-week lows and U.S. stocks sagged to levels unseen since late last month as investors dashed for the relative safety of bonds and gold.

While some investors have been able to shrug off the persistent conflict in Iraq as an unfortunate consequence of the U.S. military occupation, the situation has become harder to ignore in view of mounting resistance and a growing casualty list. Two U.S. soldiers were killed north of Baghdad on Monday, bringing to 162 the number of U.S. soldiers killed in attacks since President Bush declared the war over on May 1.

An new audio tape, purported to be from ousted Iraqi dictator Saddam Hussein and broadcast on an Arab television network on Sunday, vowed more deaths for U.S.-led troops and exhorted Iraqis to wage holy war against occupying forces.

HIGH HOPES

Some investors say the recent string of grim events and warnings came as even more of a shock to investors left enthralled by the U.S. stock market's steady rally since the spring.

Signs that the economy is finally regaining its footing boosted hopes for fatter company profits and whipped up investors' interest in equities.

The enthusiasm was fed by recent reports showing the economy grew at its fastest pace in more than 19 years in the third quarter and that U.S. businesses created twice as many jobs as expected in October.

Stocks are on course to rack up their first annual gains since 1999, with the Standard & Poor's 500 index .SPX> up a hefty 18 percent so far.

But the market's upward momentum has stalled in recent weeks, with the S&P 500 virtually unchanged over the past month, amid worries that current stock prices already reflect a strong economic rebound.
"We'd been looking for this pullback for months," said Milton Ezrati, senior economic strategist at Lord Abbett & Co. "The market has realized there isn't much more of a positive surprise on the economy. It has effectively digested a lot of good news, and now it feels more vulnerable."

Any major attacks will undoubtedly dent global stock markets, Wall Street experts say, and fears that the United States will be pulled into a costly military quagmire in Iraq that drains U.S. resources and slows the economy are also in the back of investors' minds.

But continued strength in the global economic outlook should keep stocks from sustaining any long-term damage, said Nariman Behravesh, chief economist at economic forecasting and consulting company Global Insights.

"The bottom line is that these events really have very small impacts in terms of Western economies ... or in terms of company earnings," Behravesh said. "We go through these periods where the market tends to get a little nervous and jittery, and this is one of those."

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