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Syria and tapering fears send stock markets lower

Equity markets were feeling the pain on Tuesday, as investors flocked into oil, gold and bonds amid growing concerns about a U.S. military intervention in Syria and as confusion about the Federal Reserve's stimulus program continued to weigh.

European shares experienced their biggest daily drop in two months on Tuesday, with the pan-European FTSEurofirst 300 Index provisionally closing 1.5 percent lower and a number of other major indexes ending the day down over 2 percent.

In the U.S., stocks were down by around 1 percent, following a mixed close in Asia, which saw Japan's Nikkei end the day 0.7 percent lower.

(Read more: Syria premium seen building in oil, gold)

Analysts said the increasing possibility of military action by the U.S. was a significant driver of the equity market slump. Missile strikes against Syria could be launched "as early as Thursday," senior U.S. officials told NBC News on Tuesday.

It came after Defense Secretary Chuck Hagel told the BBC that the country's military was "ready to go" if President Barack Obama ordered action against Syria. On Monday, Secretary of State John Kerry said it was "undeniable" that the Syrian government had used chemical weapons in an attack he described as a "moral obscenity."

"Syria has taken over the mantle of market concern," said Nick Lewis, head of risk at London Capital Group. "The increasing political pressure in the States to intervene led U.S. markets lower, and Europe is following."

This increase in risk appetite is being reflected in a move away from equities and into gold and oil. Brent crude oil prices soared on Tuesday, setting a new five-month high at $114.06, rallying by more than $3 on the day. Spot gold prices - which began to rise as Kerry was speaking on Monday - hit an 11-week high of $1,422.90 per ounce on Tuesday.

(Read more: Hagel: US military 'ready to go' against Syria if ordered)

"The geo-political situation is clearly weighing on the global markets and the flight to safety is playing a little bit there," Jean-Francois Robin, global head of strategy at Natixis, told CNBC.

Ishaq Siddiqi, market strategist at ETX Capital, agreed. "Syria is driving investors towards the safe haven assets," he said. "Oil prices have crept up on geopolitical tensions in the Middle East, while safe haven bonds in Europe – U.K. Gilts and German Bunds – are in favor on the risk-averse tone seen in the market."

In the bond market, U.S. Treasury prices rose and the yield on the 10-year note moved down to 2.75 percent. Gilt yields slipped to 2.58 percent, while Bunds yields moved lower to 1.847 percent.

Tapering concerns linger

But analysts warned that Syria is not the only issue spooking investors – as concerns about the timing of the scaling back of the Federal Reserve's asset-purchase program continue to weigh on markets.

(Read more: Is a spike in oil prices around the corner?)

Robert Jukes, global strategist at Canaccord Genuity Wealth management, told CNBC that the tapering debate was another factor driving markets lower.

"Syria is definitely part of it, but I would hesitate to say that is completely why we are seeing this sell-off. We have seen this situation building - the threat of chemical attacks is nearly a week old," he told CNBC," he said. "There are a lot of subplots going on."

Capital Economics' Julian Jessop added: "A combination of factors is affecting markets. There is increased uncertainty – both about Syria, and about how and when the Fed will start scaling back QE [quantitative easing]."

Data out of the U.S. on Monday added to the confusion surrounding Fed tapering. A string of positive data releases for the U.S. had led many investors to expect the U.S. central bank to announce an scaling back of its stimulus program in September, but Monday's durable goods orders data came in way below expectations, down 7.3 percent in July.

(Read more: US we have a problem, and its name is durable goods)

"Given that we have had a stream of U.S. data which supports tapering in September, investors have been pricing that into their asset portfolios to get ahead of any action by the Fed – however, the poor durable goods orders throws a spanner in the works as investors will now have to rethink expectations," said Siddiqi. "The confusion here prompts the uncertain mood we are seeing – expect more hyper volatility."

London Capital's Lewis said that tapering was continuing to "put a lid on" equity markets, adding that low trading volumes were exacerbating the instability on Tuesday.

"Any move is exaggerated in these thin markets," he said. "Everyone's studying the economic data but it's a confusing picture, and hard to tell how 'good' for stocks the news really is."

Contact World Economy

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