The escalating violence in Libya weighed on stocks Tuesday but oil prices dipped following reports the OPEC oil cartel will raise its production to make up for any shortfall from the North African country.
Oil prices have dropped back from Monday's 30-month highs amid growing expectations that Kuwait and the United Arab Emirates will join Saudi Arabia in raising output to make up for the drop in Libya, which produces nearly 2 percent of the world's daily oil. Details appear sketchy at the moment, with Gulf oil ministers indicating that no decision has yet been made to call an emergency meeting to address the surge in oil prices.
However, talk of ramped-up production put a lid on oil prices Tuesday.
By midafternoon London time, the benchmark oil contract on the New York Mercantile Exchange was down 46 cents at $104.98 a barrel, while Brent crude in London was down 99 cents at $114.07 a barrel, down around $4 on Monday's high.
Over the past few weeks, oil prices and stocks have mostly moved in opposite directions. Stocks are a leading indicator of perceptions for economic expansion and the vagaries of the oil price affect perceptions about the state of the global recovery.
That's not been the case Tuesday, as investors focused on the intense fighting in Libya. News that troops loyal to longtime Libyan leader Moammar Gadhafi have continued to strike at rebel positions has landed on already-frayed market nerves.
"A lack of significant data releases leave geopolitical tensions as the driver of markets for the moment," said Chris Walker, an analyst at UBS.
Those tensions meant any early gains in stock markets soon petered out.
In Europe, the FTSE 100 index of leading British shares was down 0.5 percent at 5,942 while France's CAC-40 fell 0.6 percent to 3,968. Germany's DAX was 1.1 percent lower at 7,086.
Wall Street was poised for a flat opening at best, in contrast to earlier expected gains _ Dow futures were down 2 points at 12,076 while the broader Standard & Poor's 500 futures was up less than a point at 1,309.70.
Analysts reckon that developments in North Africa and the Middle East will continue to be the main point of interest in the markets. The big concern is that if countries like Saudi Arabia experience an uprising on the scale of those already seen in Tunisia, Egypt and Libya, then oil could rise as high as $200 a barrel.
That would be a nightmare scenario for the world economy, as it would stoke inflationary pressures and at the same time dampen growth.
In the currency markets, the euro gave up some recent gains, trading 0.5 percent lower on the day at $1.3897.
Europe's single currency pushed up above $1.40 Monday in the wake of expectations that the European Central Bank will lift interest rates next month. That perception stands in marked contrast with the U.S. Federal Reserve, which is not expected to tighten policy anytime soon.
Earlier in Asia, Japan's benchmark 225 stock average added 0.2 percent to 10,525.19, while Hong Kong's Hang Seng rose 1.7 percent to 23,711.70. Mainland Chinese shares edged higher _ the Shanghai benchmark gained 0.1 percent to 2,999.94, while the Shenzhen Composite Index of China's smaller, second exchange added 0.3 percent to 1,307.71.
Pamela Sampson in Bangkok contributed to this report.