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But the FTSE 100 Index fought back from the worst of its earlier declines, closing down 18 points at 5996.8 as fears over a civil war in the North African country played on investors' minds.
The Dow Jones industrial average was down 0.9% and the Nasdaq Composite Index fell more than 1.7% as Wall Street reopened after Monday's public holiday and as US investors caught up on events in North Africa.
European markets were also hit by a poor session in Asia amid the Libyan turmoil and rating agency Moody's decision to downgrade the outlook on Japan's credit rating for the first time in nearly nine years.
Oil prices remained near two-and-a-half-year highs as fears continued to mount over world oil supplies due to concerns that Libya's crude exports of one million barrels a day could be affected as foreign oil companies evacuate staff from the country.
Brent crude for April delivery hit more than 108 US dollars a barrel at one stage.
The rising oil price gave support to the US dollar which was up at 1.61 against the pound. Sterling was also down to 1.18 euros following speculation that the ECB would raise interest rates sooner than previously anticipated.
Better-than-expected UK borrowing figures offered limited support to stocks, despite a £3.7 billion surplus for Britain's public finances in January thanks to a bumper tax haul.
Airline and travel stocks were particularly hard hit on fuel cost worries, with the merged British Airways and Iberia group International Consolidated Airlines down 1.3p to 238.2p.
Tour operators were also under pressure, with Thomson parent TUI Travel down 2.5p to 243.3p and second tier counterpart Thomas Cook falling 3.6p to 194.4p.
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