LONDON - WORLD markets traded lower on Wednesday despite strong gains in Asia overnight as investors booked profits after Senator Barack Obama won the U.S. presidential election and the Democrats took a firmer hold on Congress.

On Wall Street, the Dow Jones industrial average fell 170.53 points, or 1.77 per cent, to 9,454.75, while the Standard & Poor's 500 index dropped 18.30, or 1.82 per cent, to 987.45

The FTSE 100 index of leading British shares was down 106.49 points, or 2.3 per cent, at 4,533.04, while Germany's DAX was 103.21 points, or 2.0 per cent, lower at 5,174.83. The CAC-40 in France was 85.98 points, or 2.3 per cent, lower at 3,605.11.

The losses in Europe and the US follow surges on Tuesday in anticipation of an Obama victory. The Dow in fact enjoyed its best election day rally since 1984.

'Everyone was buying the rumor yesterday and selling the news today ... The market had not only anticipated an Obama victory, but from what I'm gleaning, pretty much a Democratic sweep,' said Jack A. Ablin, chief investment officer at Harris Private Bank.

Investors also know that Obama will have his work cut out for him to improve the US's immediate economic prospects and that Inauguration Day is still more than two months away.

'Between now and then there is unlikely to be much if any positive economic news,' said Howard Wheeldon, senior strategist at BGC Partners in London.

Further proof of the scale of the downturn in the world's largest economy came Wednesday with the news that the U.S. service sector contracted sharply in October as new orders and employment fell.

The Institute for Supply Management, a trade group of purchasing executives, says the services sector index fell to 44.4 in October from 50.2 in September. Analysts had anticipated a far more modest drop.

A manufacturing report issued Monday by the same organisation showed the worst reading since September 1982, when the US was in a deep recession.

Attention in Europe is shifting towards Thursday's expected interest rate reductions Thursday from the European Central Bank and the Bank of England.

Both banks are expected to follow the U.S. Federal Reserve's lead and cut interest rates by at least half a per centage point, though there's growing talk that the Bank of England may reduce interest rates by as much as a full per centage point for the first time since four cuts of that size in 1992-3 when Britain's economy was last mired in recession.

'With the 'Obama-effect' already petering-out in some markets, tomorrow's rate-setting meetings may be of considerable importance in nourishing the prevailing mood of diminished pessimism,' said Neil Mellor, an analyst at Bank of New York Mellon.

Earlier, Japan's Nikkei 225 stock average advanced 4.5 per cent to 9,521.24, and Hong Kong's Hang Seng Index added 3.2 per cent to 14,840.16.

Japanese shares were helped by the sharp fall in the value of the yen in recent days as an appetite for risk returned to the market.

Major exporters did particularly well, such as Toyota Motor Corp., up 10.3 per cent, Canon Inc., up 11.7 per cent and Sony Corp., which advanced 6.3 per cent.

Australia's main stock index rose 2.9 per cent, and Singapore's key stock measure added 2.6 per cent. India's Sensex dropped 2.8 per cent.

In South Korea, the benchmark Kospi rose 2.4 per cent, though pared gains on profit-taking and some concerns that an Obama presidency could mean a harder line on trade, analysts said.

Elsewhere, oil prices retreated after surging above US$70 (S$103) a barrel overnight. Light, sweet crude for December delivery was changing hands at US$68.65, down US$1.88.

On the currencies front, the euro was down 0.4 per cent, at US$1.2918, and the dollar was 0.9 per cent lower at 98.79 yen. -- AP