Gold traded around $3 an ounce higher and bond prices climbed, squeezing their yields. Wall Street looked set to open slightly lower after being battered on Tuesday.
Investors' hopes for a quick end to the war have been sinking fast amid graphic pictures of captured and dead US soldiers, fierce resistance from Iraqi troops, and a tough battle for Baghdad looming.
Governments across the world were also beginning to count the cost of the war. US President George W Bush was seeking $75 billion in emergency funding.
The market mood was a complete about-face from the past few weeks when stock markets rallied and safe-haven positions were dropped in a relief rally over the end of uncertainty about the start of the war and a view it would be over swiftly.
"What's happening in all these markets is that we are seeing a rethink about the war," said Nicole Elliott, technical analyst at Mizuho Corporate Bank.
"This means we are back to the long-term trend of lower (bond) yields, a weaker dollar, and weaker stocks."
Stocks wobble, oil climbs
European shares were mixed after a morning of steep losses and a brief surge into positive territory. They lost as much as 5.5 per cent on Monday.
The FTSE Eurotop 300 index was down 0.45 per cent and the narrower DJ Euro Stoxx 50 was up 0.02 per cent. Both had earlier been down more than two per cent.
"We have not had the experience of a long war for years, not since Vietnam, and visibility is now quite low," said Thierry Lacraz, a strategist at Geveva bank Pictet & Cie.
Earlier, Japanese closed lower. The Nikkei fell 2.33 per cent or 196.31 points to 8,238.76, wiping out most of a 2.93 per cent rally in the previous session. The broader TOPIX fell 2.30 per cent to 812.29.
Oil prices built on Monday's gains and last week's four- month lows, although they were still well off recent near $40- a-barrel highs. Prices were also driven up by tribal violence in Nigeria which has cut that country's crude output by 40 per cent.
The price of oil has been of particular concern to markets in the run up to war because of the damaging effect increases can have on the stuttering global economy.
U.S. light crude was up 60 cents to $29.26 a barrel, extending Monday's $1.75 jump. London's Brent crude climbed 49 cents to $26.58 a barrel.
"The market is responding to difficulties in the Iraq campaign. It had priced in the perfect war and had gone so far as building in a victory discount, which is now being eroded," Sydney-based oil analyst Simon Games-Thomas said.
Search for safety
Concerns the war could last longer than initially expected boosted traditional safe-haven investments like government bonds and gold for a second straight day.
"New safe-haven buying seems to be creeping into the market at the moment as the easy victory by US/UK forces in Iraq seems to be slipping," said James Moore, analyst at TheBullionDesk.com.
The two year Schatz yield was 1.9 basis points lower at 2.54 per cent, while benchmark 10-year Bund yields were 3.5 points down at 4.17 per cent.
Yields on the 10-year US Treasury fell two basis points to 3.95 per cent.
Spot gold traded at $332.60/333.10 an ounce, up from $329.50/0.25 at Monday's close in New York. It had earlier risen as much as $4.50 an ounce.
On the foreign exchange market, the dollar was down around its lowest level against the euro and other major currencies since the start of the war.
The dollar was down around half a per cent on the day against the euro at $1.0689 and the Swiss franc at 1.3775 francs .
It was down more than three-quarters of a per cent against the yen, below 120 yen , after yen bears were disappointed the Bank of Japan took no radical steps to tackle deflation and weaken the Japanese currency at an emergency meeting on Tuesday.
"While progress is still being made it's quite clear there is significant Iraqi resistance and the government in Iraq is not going to collapse as quickly as initially hoped. That's pressuring the dollar across the board," said Shahab Jalinoos, currency strategist at UBS Warburg in London.