European and US markets were expected to build on the Asia stocks rally, with London bookies calling for German shares to open 2% higher and early futures trading pointing to Wall Street gaining 1.4% to hit a new 18-month high.

Financial bookmakers in London expected Britain's FTSE to open 1.27% higher, Germany's DAX to start up nearly 2% and France's CAC-40 to begin about 1.7% higher.

Former Iraqi president Saddam's capture by US troops late on Saturday saw crude prices fall more than a dollar as it raised the prospect of fewer sabotage attacks on Iraq's oil industry and a boost to world supplies.

Gold prices tumbled as the dollar rose, while Japanese stocks jumped more than 2%, boosted by exporters such as Toyota Motor Co.

Short-term gain

Analysts said hopes for a shorter US occupation in Iraq would be a plus for the US economy and a psychological boost for the beleaguered dollar, but the impact was likely to be short-term, given the rising US current account and budget deficits.

"There will be some early applause from Wall Street, but it will be subdued because there is a long road ahead"

Hugh Johnson
Chief Investment Officer, First Albany Corp

"At least for now, we should see a swifter-than-expected end to the US occupation in Iraq and that's welcome," said Kazunori Jinnai, general manager at Daiwa Securities SMBC.

US stocks were expected to enjoy a brief rally, with Nasdaq 100 futures up 26.5 points at 1449.

"There will be some early applause from Wall Street, but it will be subdued because there is a long road ahead," said Hugh Johnson, chief investment officer at First Albany Corp in New York.

"It does not signal the end of terrorist attacks both around the world and in the United States."

As of 04:05 GMT, shares in Japan had risen 2.7%, Australia climbed 0.9% and South Korea was up 1.3%. Hong Kong was up 0.5%, while Singapore rose nearly 1%.

An MSCI index of Asia Pacific shares outside Japan was up 0.6% at a three-year high.

Dollar rebounds

The dollar, which has been weighed down by a huge current account deficit and security concerns in Iraq, was fetching 107.97 yen, compared with a three-year low of 106.74 yen hit last week and 107.80 yen in late New York trade on Friday.

The US dollar is up against the yen,
the Swiss franc and the euro

The dollar was also up against the safe-haven Swiss franc at 1.2727 franc from 1.2621. Against the euro the dollar stood at $1.2208, after hitting a record low of $1.2306 on Friday.

Ten-year US Treasuries fell more than a half point to 99-17/32, pushing their yield to 4.31% from 4.24% in late US trade on Friday.

Japanese government bonds (JGBs) fell as stocks jumped, but declines were seen as limited as many traders remained sceptical over whether violence in Iraq would cease.

"Stocks went up and bonds fell as the initial reaction but I don't think this will continue," said Hiroyoshi Sandaya, an analyst at Goldman Sachs. "This effect may last only for today."

The yield on Japan's benchmark 256th 10-year cash bond was up six basis points at 1.355%.

US indexes up

Major US stock indexes have risen sharply since the start of US military operations in Iraq in March, propelled by signs of a reviving economy and higher corporate profits.

A rally on Wall Street on Monday could carry the blue-chip Dow Jones industrials to fresh 2003 highs above the key 10,000 mark, which it closed above on Thursday for the first time in nearly 19 months.

For the year, the Dow is up 20%, while the tech-heavy Nasdaq is up 46%.

In Asia, brokerages and exporters led markets higher, while oil stocks fell.

Japan's Fujitsu and Toyota each climbed more than 2%, while in Hong Kong, oil firms PetroChina and CNOOC each fell about 2%.

South Korea's Hyundai Engineering and Construction Co shot up by a daily limit of 15%, on hopes that $1.1 billion owed by Iraq could be forthcoming.

US investors were expected to tread cautiously, looking at a New York regional manufacturing survey on Monday to see how well the sector's big rebound is doing in the year's final month.

The market will also look at the US consumer price index on Tuesday, a key gauge of inflation.

US oil dropped to $32.02 a barrel, while gold was quoted
at $402.75, well off a New York close on Friday at $408.90.