Financial markets across the world are bracing for more days of uncertainty as the fighting in Iraq rages, with nagging fears that a prolonged war or an unexpected event could undermine recent stock rallies and push oil prices back up.

Iraqi forces loyal to President Saddam Hussein inflicted casualties and took their first US prisoners on Sunday, persuading some investors to buy safe-haven investments. Bonds ticked up from two-month lows and gold climbed off three-month lows.

"Developments over the weekend have clearly poured some cold water on the dollar," said Kosuke Hanao, head of the foreign exchange sales section at Royal Bank of Scotland in Tokyo.

"But many still believe that things are developing in favor of the United States. So there should be plenty of bargain-hunting demand if the dollar falls sharply."

On the foreign exchange market, the dollar, which hit a three-month high against the Japanese yen on Friday, fell slightly against the yen and the euro in Monday trading. US Army General John Abizaid said that Sunday was the "toughest day of resistance" so far encountered by US-led forces in four days of war against Iraq.

The dollar hit two-month highs on the euro and the safe-haven Swiss franc on Friday as markets turned optimistic over prospects for a swift conclusion to the conflict.

The yen was quoted at 121.16 yen at around 0130 GMT, versus 121.50 in late US trade on Friday, while the euro was trading at 1.0582 dollar against about 1.0525 dollar.

Oil prices climbed two percent as US warplanes again pummeled Baghdad early on Monday. US light crude oil rose 56 cents a barrel to 27.47 dollars.

Tokyo stocks rose almost three percent after their US peers rose for an eighth straight session on Friday, when Japanese markets were closed for a holiday. The Nikkei average was up about 230 points at 8,425.61.

The South Korean stock benchmark fell 0.7 percent, Singapore eased 0.3 percent and Australia lost 0.2 percent, but Taiwan advanced 0.4 percent.

US stocks surged on Friday, with the Dow Jones Industrial Average rising 8.36 percent last week and recording its eighth day of gains and its best week since Oct. 1982. In Europe, the blue chip FTSE Euro top 300 gained 7.8 percent for the week and was up more than 19 percent since March 12.

But fears that Iraq would use chemical or biological weapons against advancing US and British forces; that there could be terrorist attacks; or that Iraq would torch its oil fields continued to make investors highly cautious.

Investors were expected to keep a particularly keen eye on the oil market, where prices have been tumbling from the near 40 dollars a barrel highs they reached in the run-up to the war.

Analysts said last week's trends which saw stock markets rise sharply, oil prices plummet and safe-haven investments lose favor should generally continue on the widespread view that US-led forces would prevail.

(Xinhua News Agency March 24, 2003)