The buildup to the combat, combined with a harsh winter, sapped demand for manufactured goods, and left businesses unsure whether to hire or fire staff, the reports showed.

When the first missiles were launched, people stayed home to watch the television coverage, further stalling activity.

US manufacturing activity, measured by the Institute for Supply Management (ISM) purchasing managers' index, slumped to 46.2 points in in March from 50.5 in February.

A reading below 50 points indicates an industry contraction.

The shrinkage in the manufacturing sector broke four consecutive months of growth.

"Today's ISM report dashes the hope that the industrial sector of the economy is pulling out of downturn that began last fall," said Manufacturers Alliance chief economist Daniel Meckstroth.

"War jitters undoubtedly hurt the economy but unseasonably severe weather and the decline in payrolls play an important role," he said.

"Declining production activity in manufacturing means that the overall economy cannot hope to achieve anything better than tread water in the months ahead."

Meanwhile, US employers announced 85,396 job cuts in March, down 38 percent from February and the lowest level of cuts in six months, said a report by outplacement firm Challenger, Gray and Christmas Inc.

"March marked the culmination of the war build-up, and it clearly caused American businesses to put major decisions and actions on hold. One result: job cuts fell to their lowest level since September, 2002," said the firm's chief executive, John Challenger.

"Corporate America is stuck in limbo. The one thing we do not expect is significant job creation," he said.

The number of job cuts in March was down 17 percent when compared with March 2002.

In the important area of consumer activity, some of the first signs of the impact of the Iraq combat revealed weakness.

Consumers, glued to television for the opening shots of the Iraq war, sent sales into a 1.4-percent slump at US retail chain stores in the week ending March 29, according to a barometer drawn up by Bank of Tokyo-Mitsubishi and UBS Warburg.

It was the steepest fall since December 2002.

"The 'CNN effect', which is the tendency for potential shoppers to stay home and watch the war coverage on television, was seemingly instrumental in restraining sales," the survey said.

The Iraq war appeared to have a bigger initial impact on chain store sales than in the comparable period of the Gulf War, it said.

Sales were generally below expectations, the survey said.

Some reports also suggested that stores near US borders also suffered as fewer people crossed into the United States to shop.

Sales at chain stores in March were expected to be between flat and down 1.0 percent, partly because of the later arrival of Easter, which lands April 20 this year compared to March 31 last year.

Consumer spending accounts for two-thirds of US economic activity.

Despite the nerves, US share prices rebounded, with the Dow Jones industrials average climbing 77.73 points or 0.97 percent to close at 8,069.86.

Most investors believed the war would be over in two or three months, said Mark Vitner, economist at Wachovia Securities.

"Our general sense is the war is going much closer to expectations than widely thought. Most of Iraq's oilfields have been secured, air fields in western and northern Iraq have been seized and Baghdad is surrounded."

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