EUROPEAN stock markets sank again yesterday, as investors looked ahead nervously to a tough US military response to the terrorist outrage and to a restart of Wall Street trading scheduled for Monday.

The US Senate passed unanimously a resolution authorising use of force against those responsible for Tuesday's attacks in New York and Washington, and Afghanistan's ruling Taliban promised revenge if it were the subject of US retaliation.

The continuing move to a war footing by George W Bush, US president, heightened expectations of a speedy response and sent the dollar falling with equities.

One trader in Frankfurt asked: ''Who knows what might happen over the weekend in terms of retaliation strikes from the US?''

Bleak US industrial production figures - showing a 0.8% drop in August - added to stock market woes. It was the 11th consecutive monthly decline and dashed hopes that manufacturing was on the verge of a rebound.

The safe havens of US Treasuries and gold were again in demand, and the oil price spiked once more as global tensions mounted.

In London, the FTSE-100 plunged 187.9 points, or 3.8%, to 4755.7. It had recovered some of its losses on Wednesday and Thursday but yesterday's reverse took it back within sight of Tuesday's 4746-point close.

The Eurotop 300 index, and

the French and German stock markets all plummeted about 5%.

Michael Hartnett, head of stockbroker Merrill Lynch's European equity strategy and economics team, said: ''There is no roadmap. It is a completely unprecedented situation. Elements of 1998's Long Term Capital Management hedge fund crisis, the Kobe earthquake, and, worse case, the Gulf war are all apparent.''

Hartnett added that the ultimate investment outcome would depend on the monetary policy response and the ''degree and geography of political reprisal, through its impact on oil prices''.

Commentators have predicted big and early US interest rate cuts by the Federal Reserve, possibly of up to one percentage point in two quick moves.

Pedro Solbes, European Union Monetary Affairs Commissioner, said the attacks on the US could mean European growth this

year would fall below his recent forecast of 2%.

But he emphasised he was ''not speaking about recession''.

A three-minute silence, at 11am UK time, was observed yesterday throughout Europe to mark the US tragedy.

Trading on the London Stock Exchange (LSE) ground to a complete halt. Asked if there had been any trading, an LSE spokesman replied: ''As far as we are aware, there was none.''

In London, the Footsie was initially in positive territory but nerves grew as the day went on and it was down 200 points for a brief moment. Volume of 2.1 billion shares was close to this year's daily average of 2.2 billion.

There were only six gainers, as investors piled into defensive stocks. Supermarkets Tesco, Safeway, and Sainsbury, engineering group Smiths Industries, South African Breweries, and household products company Reckitt Benckiser bucked the trend.

British Airways suffered again because of the grim outlook for transatlantic air travel. It lost another 16% yesterday to 165p, and is nearly 38% lower than its 264p close on Monday. Job cuts are feared in the airline sector.

The New York Stock Exchange, Nasdaq, and American Stock Exchange assured investors they would reopen on Monday if a

raft of equipment tests over the weekend were successful.

A sell-off is expected at the open, with stock markets elsewhere now well down on levels before the terrorist attack.

Reopening on Monday continued to look ambitious, with much of Manhattan in ruins.

''I think a good part of the Wall Street community is emotionally spent,'' said Rick Meckler, president of investment firm Liberty View in New Jersey.

Merrill Lynch's Hartnett was confident the central banks could ensure financial systems operated smoothly, and believed they would be prepared to assume obligations for firms for which there were doubts about ongoing business viability.

Richard Bernstein, Merrill Lynch's chief quantitative strategist, urged investors to be ''calm, cool, and collected''.

He said: ''No-one truly knows what the effects of this devastating event on the financial markets over the next three, six, or 12 months will be. We think the better investment opportunities will be for those waiting and looking for the over-reaction to events, than for those rushing to be part of the crowd trying to react.''

Oil prices, which had surged on Tuesday, did so again. Brent crude futures were last night up 98 cents at $29.35-a-barrel.

''People are buying up all the crude they can get because they think there is going to be a shortage of oil,'' said one trader.

US bond prices continued to rise. Yields on two-year US Treasury notes fell even further, to about 2.9%.

The Swiss franc, viewed as a safe haven in times of crisis, rose to all-time highs against the euro and eight-month peaks against the dollar yesterday.

Gold fixed in Europe at $285.75 per troy ounce, up $4.75 on Thursday's close in London.

The day had started more positively for equities with Tokyo's Nikkei average jumping 4% and regaining the 10,000 mark.

Sushil Wadhwani, an independent member of the Bank of England's rate-setting monetary policy committee, told an audience in Helsinki that UK monetary policy would respond to any sharp fall in consumer confidence.