In fact, the BSE Sensex had gained nearly 500 points in the last one month on hopes that Kargil conflict is over. ``If there is any escalation in the Indo-Pak conflict, the entire gain in the last one month will be wiped out. Nobody wants that situation,'' said a senior NSE dealer. Similarly, the rupee which is already under pressure will take a beating. Besides, the overall investment climate and business confidence will be affected, brokers and business captains fear.

Brokers expect the markets to open with a substantial gap on the lower side on Wednesday trades. The huge long position is more a matter of concern for the market than the chances of escalationof the Indo-Pak tension.``With net outstandings in excess of Rs 1,900 crore on BSE, it was not possible for the market to go up anyway. And with some adverse news coming in, the market can only do down from the present level,'' said a broker. Though kerb (unofficial) quotes for various scrips were not available, brokers fear the worst.

According to an official with a foreign investment firm, FIIs and the FIs are now likely to adopt a wait and watch stance before taking a plunge into the market. Wednesday's market sentiment would mainly be driven by the developments in the Indo-Pak relations and the FII investments as the market is placed in a nervous zone, they add. ``We are looking at a Sensex level of 4250 within the next few trading sessions,'' said Ambareesh Bagila. With the volatility of the rupee, the FIIs have stopped bringing in dollars at the current level and the domestic institutions are also selling,'' said another broker.

On late Tuesday, the shooting incident pulled down the prices ofgovernment securities even as the rupee closed at 43.42/43 against the dollar losing marginally over the Monday's close of 43.40/41. The foreign exchange and government securities market were seen going into a tizzy on Wednesday. The rupee opened lower at the 43.50 level. ``The rupee will be under pressure in early trades, but it will not go into a free fall. Overnight developments will also have to be watched for,'' said a dealer.

"The rupee will definitely come under pressure. The first half-hour will be critical," Mecklai Financial Services' senior vice-president, K N Dey, said. The rupee fell to a low of 43.58 on Monday as corporate and inter-bank demand for dollars coupled with long-dollar positions built up over the weekend.

However, there was mixed reaction from Corporate India to the shooting down of the Pakistani aircraft. Says S Kumar Synfabs managing director, Nitin Kasliwal, "Let us hope that this is a stray incident. If it results in a war-like situation, it will have a dampening effect oncorporates".

President of the Indian Drug Manufacturers' Association (IDMA), Dr GG Nair said, "We could be headed for an emergency-like situation. The focus should be on national security rather than politics. And yes, if it takes a Kargil tax, we must be ready to sacrifice something in national interest".

On whether polls at this juncture were necessary, Heinz managing director, Pradeep Poddar said, "Why shouldn't we have elections. I think we as a nation have achieved maturity in terms of delinking the economic situation from the political situation. This has augured well for business in general, even at a time when there is a recession".