US stocks closed higher yesterday but well off their session highs after the US Senate surprisingly voted to halve President George W. Bush's proposed tax cuts and dashed hopes for an aggressive tax plan to energise a sluggish economy.

The Republican-led Senate voted to slash Bush's proposed $726 billion (€674 billion) tax-cut plan to around $350 billion amid concerns over ballooning US budget deficits and costs tied to the against Iraq.

The late slide ended a rally sparked by news of Iraqi civilians rising up against the regime of President Saddam Hussein in the city of Basra.

The blue-chip Dow Jones industrial average closed up 65.55 points, or 0.80 per cent, to 8,280.23, according to the latest figures. It had traded up well over 1 per cent earlier.

The broad Standard & Poor's 500 index added 10.51 points, or 1.22 per cent, to 874.74.

The tech-led Nasdaq Composite Index was up 21.23 points, or 1.55 per cent, at 1,391.01, after an earlier rise of more than 2 per cent.

European shares rose, erasing steep morning losses on war worries. They had lost as much as 5.5 per cent on Monday. The FTSE Eurotop 300 index was up 1.37 per cent and the narrower DJ Euro Stoxx 50 was up 2.15 per cent. Both had earlier been down more than 2.8 per cent.

In Dublin, the ISEQ lagged the rally that lifted most major European markets into positive territory as weakness in the main financial stocks took its toll.

The Irish stock market pared early losses in afternoon trading, cutting a drop of 2.5 per cent at one stage of the day to a loss of just 1 per cent by the close.

Bank of Ireland lost 3 per cent of its value in the wake of a trading statement, while AIB shed 2 per cent, although dealers said trading in Dublin was light.

Equities and the dollar had pared earlier losses on reports of an uprising against Iraqi troops in Basra, fanning hopes that the war could end soon. Those reports and the equity bounce shaved the earlier gains in gold, oil and US Treasury prices.

"This report that Basra has had a popular uprising started some dollar buying just in the last hour or so," Commerzbank trader Mr Mike King said.

Earlier, oil, bond and gold prices had risen as investors sought safe havens ahead of Iraq fighting that the Pentagon said would be the toughest yet. The dollar had eased on sentiment that the campaign against Iraq could be a slow slog.