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Markets catch up on Syria and watch Fed: El-Erian

The financial markets on Tuesday were catching up to the reality that the "potential disruptions" over Syria are likely to be less than previously thought, Mohamed El-Erian, Pimco CEO and co-CIO, told CNBC.

With ties to the Mideast, El-Erian—who grew up in Egypt and whose father worked at the Egyptian Mission to the United Nations—said in a "Squawk Box" interview, "Syria on a standalone is not that important."

"It's not a big economy. It doesn't really produce any that's impactful. It's oil production is 50,000 barrels a day." El-Erian quipped, "That is a rounding error."

But Syria has "massive network effects," he explained. "If you list the countries that are somehow connected to the tragedy, it's a very long list: Israel, Iran, Iraq, Saudi Arabia, Bahrain, Turkey and it goes on."

(Read More: Syria strike would send 'global message': Menendez)

A ripple effect in the region from any U.S. military action in Syria is what the White House and lawmakers on Capitol Hill want to avoid.

President Barack Obama said Monday he's confident that Congress will approve a strike against Syrian President Bashar Assad for what he views as clear evidence that Assad used chemical weapons two weeks ago on a rebel-held area outside the capital city of Damascus. More than 1,400 people were killed in the attack—many of them women and children.

El-Erian described the situation in Syria as an "awful human tragedy," for which he would not speculate on how to solve.

But he did say that from an investment point of view the movements in the oil market are key. In the past few sessions, oil prices have dropped a bit from their two-year highs of earlier last week when military action in Syria seemed imminent.

"The oil price is the least distorted market variable to look at if you want to assess what's the likelihood of an escalation regionally," El-Erian added. "That's what we care about because that's where you get the impact on global growth."

As for the economic conditions around the world, he said that while "there is no doubt the global economy is healing," he's not ready to declare the "new normal" in the U.S. of slow growth, high unemployment and government debt over yet.

The debate in the markets is whether the Federal Reserve sees enough economic growth to start to pull back its $85-billion-a-month bond-buying program—perhaps as early as this month.

"What the market has look at is the balance between the good reason to exit with the bad reason to exit" for the Fed, El-Erian contended. The "bad reason" he described would be the economy is not strong enough, but Fed policymakers start to taper anyway because they're concerned about the negative effects of continued asset purchases.

The Fed wants "us to focus on the journey. But the market will want to focus on the terminal values," he concluded. "It's that conflict that's going to play out in the market in the weeks and months to come."

By CNBC's Matthew J. Belvedere. Follow him on Twitter @Matt_SquawkCNBC.

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