Dow slides on fears of drawn out war

War euphoria wore off on Wall Street today as investors realised that Operation Iraqi Freedom might not be so quick after all.

The Dow Jones industrials gave back more than 300 points after its best week in two decades.

With Allied forces encountering resistance from Iraqi troops over the weekend, many investors chose to cash in profits following a stunning eight-day rally by the Dow and Standard & Poor’s 500 index.

“Going into the weekend, investors had this anticipation that there was a good chance that Saddam (Hussein) was killed and war might be ended,” said Doug Sandler, chief equity strategist at Wachovia Securities. “The reality was that war is never clear and it’s always worse than people expect.

“It’s also just as much natural profit-taking,” he added. “We had a such a huge run-up so you would expect you would get a retracement.”

The Dow closed down 307.29, or 3.6%, at 8,214.68, having gained 8.4% last week, its best showing since October 1982. The blue chips advanced in the previous eight sessions, their longest streak since December 1998.

Today’s decline was the biggest for the Dow since September 3, when the blue chips closed 355 points lower. It erased nearly one-third of the Dow’s 997-point gain from the previous eight sessions.

The broader market was also sharply lower today. The S&P 500 index dropped 31.56, or 3.5%, to 864.34, after a weekly gain of 7.5%.. The index also has posted eight straight days of gains, its best performance since June 1997.

The Nasdaq composite index lost 52.06, or 3.7%, to 1,369.78, having advanced 6.1% last week. It rose in six of the previous eight sessions.

U.S.-led forces today pushed toward Baghdad, meeting resistance from sandstorms and Saddam’s troops. Iraq claimed to have shot down two U.S. helicopters and taken two pilots prisoner, a day after more than 20 Americans were killed or captured.

Saddam, meanwhile, sought to rally his people with a televised speech that proclaimed “victory will be ours soon”. Over the weekend, Iraqi television showed five captured U.S. soldiers.

Stocks surged in the past two weeks on growing investor confidence in a brief and victorious war, but analysts have said that would quickly change should the conflict become prolonged. They also say trading will likely be choppy as investors focus on the latest war developments.

“This is going to be a very hard market in the coming days,” said Russ Koesterich, U.S. equity strategist at State Street Corp. in Boston.

“Anything that indicates this war is going to drag on is going to pressure the market.”

All 30 stocks making up the Dow Jones industrials saw declines today, including Altria, which fell 1.45 dollars to 33.59 dollars. That came after an Illinois judge ordered Altria’s Philip Morris unit to pay 10.1 billion dollars for misleading smokers into believing its light cigarettes are less harmful than regular labels. Philip Morris said it would appeal the decision.

Airline stocks also took a hit on concerns that a prolonged war would dampen travel. AMR, parent of American Airlines, fell 30 cents to 2.08 dollars, while Continental dropped 1.17 dollars to 5.65 dollars, and Delta lost 1.73 dollars to 9.52 dollars.

Gainers, meanwhile, included defence companies on expectations of greater demand for their products. Lockheed Martin rose one dollar to 46.41 dollars, while Northrop Grumman climbed 2.08 dollars to 84.43 dollars.

Declining issues outnumbered advancers 11 to 3 on the New York Stock Exchange. Volume was moderate.

The Russell 2000 index, which tracks smaller company stocks, fell 8.98, or 2.4%, to 367.25.