War in Iraq has already started denting the global economy, data and reports have showed, stoking fears of even greater damage ahead as the chances of a protracted war seemed to be rising.
The International Monetary Fund warned a long war could undermine the global recovery and disappoint markets which had generally bet on a fast outcome. Even a short war might have longer-lasting economic fallout, it said.
European Central Bank Governing Council member Ernst Welteke said a long war would more likely lead to protracted global economic weakness than to a quick recovery.
"A long-lasting Iraq war would darken the economic perspectives for the world economy," Mr Welteke told Reuters. Fellow board member Eugenio Domingo Solans said separately that ECB interest rate policy would hinge on developments in the war.
Meanwhile, morale among businesses in France sagged due to uncertainty over the US-led war, with industry growing increasingly worried about the economic outlook for the second-largest economy in Europe's single currency zone.
"Clearly the uncertainty has hit companies' and probably consumers' confidence and the second-half recovery that we and others were forecasting is looking increasingly precarious," said Jonathan Hoffman, an economist at RBS Financial Markets.
Elsewhere, Danish unemployment hit a three-and-a-half-year high with employers reluctant to create jobs on account of the war, and a key Dutch think-tank warned a prolonged conflict could cause its gross domestic product (GDP) to shrink.
"The expectations get more unfavourable if the war and international tensions continue longer," the Dutch Central Planning Bureau said.
The war in Iraq to oust Iraqi President Saddam Hussein entered its second week, with US-led troops reportedly making steady progress.
Signs the war might take more than just the few days or weeks that optimists had once predicted led markets to brace for more havoc to come. Oil jumped more than a dollar a barrel, shares sank and safe-haven bond prices rose.
IMF director Gerd Haeusler, delivering a Fund report on economic risks, said the economic damage could be long-lasting even if the war was short.
"What will it mean for the region, whether or not the likelihood of terrorist attacks might diminish or, some say, even increase... are issues which are far more important than the question of whether the war may take a week longer or not," he told a press meeting.
Spreading terrorism could undermine the fragile global recovery and a steep fall in the dollar could also destabilise markets already struggling to recover from the bursting of the asset price bubble, the Fund report said.
The dollar sagged in the weeks leading up to the war, but recovered as soon as fighting started. Stocks veered up at the same time, and oil prices, which had been well over $30 came down to around $25. But these trends have now started reversing.
War has begun to affect some businesses directly, including flight cancellations by airlines around the world. American Airlines, the world's largest carrier, said it would cut international flights by six per cent in April, adding to a cut of seven per cent on US domestic routes announced previously.
Europe's largest travel firm TUI AG said this week it had more than doubled its cost-cutting targets for 2003, to offset weak tourism demand.
But if oil prices were to pick up more rapidly in coming weeks again, that could put a considerable brake on growth right across many sectors of the major economies.
Oil prices would be the key determinant of how the war could affect the 12 nations in the €6.5 trillion area economy, European Central Bank Chief Economist Otmar Issing said in testimony before the European Parliament this week.
"The pessimistic scenario foresees a strong and protracted increase in oil prices accompanied by a rather severe loss of confidence, giving rise to expectations of subdued demand," Mr Issing said.
On the other hand, a short war could lead to a faster recovery with market turbulence diminishing, he said.
While it is a positive fact that oil prices have been relatively tame up to now, monetary authorities have little room to support the global economy with cheaper borrowing costs, as official interest rates are already very low.
The ECB lowered its benchmark refi rate by a quarter percentage point to 2.50 per cent in March, but it still has more room than its US and Japanese counterparts.
"The nightmare scenario is a longer war and a higher oil price. Taking these two together we could be talking recession," said Mr Hoffman at RBS. "That would be a very risky situation."