European stock markets recovered from their session lows as a Wall Street meltdown moderated, but stock indices hovered near October 1998 levels with investors braced for war and wary of a global recession.

Chemicals, energy, insurance and airline stocks - already down heavily in the wake of last week's terrorist attacks in New York and Washington - remained weak as profit warnings from major European companies proliferated, with fears of more to come.

A gloomy German Ifo business confidence report added to fears that a global recession was already on its way before the attacks on the United States.

"This fall in the Ifo survey is even before the impact of the attack on the WTC and Pentagon could have been taken into account and before the latest wave of corporate cutbacks have had a chance to be factored in," said David Brown, chief European economist with Bear Stearns. Most of the major European markets fell as much as 7 per cent before they recovered to end down between 2 and 3 per cent, as were the main pan-European FTSE Eurotop and Dow Jones Stoxx indices.

In London, the FTSE-100 index closed down 123.2 points or 2.7 per cent at 4,433.7, its lowest close since April 1997, but up from 4,219.8, another 4-1/2 year intra-day low.

Prices across Europe rallied late during the day after Wall Street briefly climbed and defied predictions of a 400 point dive, but the prospect of a protracted war of retaliation after last week's attacks on the United States cast a long shadow over the market.

Adding to the nervous tone, analysts were expecting another heavy dose of corporate "confessions" next week as the third quarter comes to a close and companies use the latest economic turmoil as yet another reason for caution.

The consumer cyclicals sector, loaded with airlines and luxury goods makers, dropped 4.4 per cent but remained well off session lows after the U.S. government agreed on a $15 billion industry bailout.

British airlines, aviation insurers and the government reached a deal ending an insurance crisis which had threatened to ground aircraft, a government source said.

Energy shares faltered, losing four percent as Brent crude oil prices slumped amid concerns a global recession would slash demand. German insurer Allianz fell nearly nine per cent, dragging down the already bruised insurance sector as it joined the ranks of insurers worldwide forced to raise forecasts for damage claims from last week's attacks on US targets

After a gruelling week that saw markets losing ground every day, investors were looking nervously to next week with the threat of war looming large.