The violence in Libya, which has effectively split the country into two, dominated markets again Thursday, sending stocks lower and oil prices even further above $100 a barrel.
With reports indicating an escalation in the violence in and around the capital city of Tripoli, now that large parts of the country are in the control of opposition groups, there are fears that longtime leader Moammar Gadhafi may be preparing for a final showdown.
The chaos has disrupted the North African country's oil output _ Libya produces about 1.6 million barrels of crude per day and has the biggest oil reserves in Africa _ and stoked worries that other bigger producers, such as Saudi Arabia, could face protests of their own. So far this year, the longtime leaders of Tunisia and Egypt have already had to quit following massive popular uprisings.
Unsurprisingly, oil prices have surged over the past week, hurting stocks.
In London, Brent crude for April delivery was up another $3.35, or 3 percent, at $114.60, while the New York rate rose $2.67, or 2.7 percent at over $100.77 a barrel. The New York contract has soared an astonishing 20 percent over the past week.
"Clearly this spike in the price of oil, unless it is just temporary, could well have quite an unfavorable affect on the global recovery process," said David Buik, markets analyst at BGC Partners.
Fears that the global recovery from recession may come to an abrupt halt amid sky-high oil prices have weighed on stock markets all week, especially at a time when inflationary pressures are mounting. Stagflation _ the combination of rising inflation and lower growth _ is hardly a condition investors were dreaming about as they chased a number of stock indexes up to their highest levels since the summer of 2008.
"Global stock markets continue to fall out of bed as they should as fickle leading indicators of the health of the economy," said Andrew Wilkinson, senior market analyst at Interactive Brokers.
In Europe, the FTSE 100 index of leading British shares was down 0.3 percent at 5,908 while Germany's DAX fell 1 percent to 7,121. The CAC-40 in Paris was 0.1 percent lower at 4,008.
Wall Street was poised for another retreat at the open _ Dow futures were down 16 points at 12,078 while the broader Standard & Poor's 500 futures fell 3.5 points to 1,302.20.
A similar picture emerged in Asia earlier, with most markets, apart from mainland Chinese shares, ending lower.
The biggest underperformer was Japan's Nikkei 225, which dropped 1.2 percent to close at 10,452.71.
Japanese stocks have been further weighed down by a rebounding yen as the currency benefits from its perceived status as a safe haven asset _ a higher yen hurts Japan's exporters. By mid afternoon London time, the dollar was down 0.8 percent at 81.73 yen.
Analysts said one of the surprises of the current rise in risk aversion in the markets is the fact that the dollar has not benefited at all. Even the euro was up another 0.1 percent Thursday to $1.3771.
A number of reasons have been put forward to explain the dollar's lack of safe haven appeal, including the expectation that the Federal Reserve will lag other central banks, such as the European Central Bank and the Bank of England, in raising interest rates to combat the inflationary spike currently underway.
"The dollar continues to remain weak unusually unaffected by the turmoil emanating out of the Middle East, its role as a safe haven currency being usurped by the Swiss franc and Japanese yen," said Michael Hewson, market analyst at CMC Markets.
"It would appear that the single currency (euro) and sterling (British pound) are also benefiting from the perception that the Fed will be well behind the curve in any tightening cycle," Hewson added.
Kelvin Chan in Hong Kong contributed to this report.