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Until a clearer picture emerges, they will want to steer clear of riskier assets as they recalibrate positions.

One thing seems certain: Oil prices will renew their advance posing a new challenge for global recovery. Some analysts said benchmark Brent crude could surge $5 toward the recent two-and-a-half year peak of $119.79, after closing Friday at $113.93 a barrel.

Western forces pounded Libya's air defenses over the weekend to repel Libyan leader Muammar Gaddafi from rebel strongholds as they enforced a U.N. Resolution. The attacks are set to continue in coming days. Analysts said the strikes create fresh uncertainty.

"It's an open-ended question because we don't know whether the air strike on Libya will turn into a quagmire or a quick victory,' said Boris Schlossberg, a currency strategist at GFT in New York.

"If the situation drags on, this will make investors pull in their horns because it creates yet another geopolitical hotpoint."

The United States said Sunday it expects to conduct more air strikes on Libya as part of enforcing a U.N. resolution.

As the Japanese nuclear crisis unfolded last week and the death toll from the tsunami rose, investors pulled out of riskier assets pressuring global stocks, while the yen surged on the prospect of Japanese investors bringing their money home.

Oil already had advanced last week and further gains could threaten to manacle future global economic growth. It is enough to make some longer-term investors freeze, or at least sit on the sidelines and not make major moves.

"The situation is too fluid and too uncertain to warrant changes," Joost van Leenders, strategist at BNP Paribas Investment Partners, said in a note to clients.

Equity market losses since the earthquake in Japan have been around 2 percent, as measured by the MSCI World Index. In Tokyo losses were worse., falling 10 percent. Volatility has risen, but is still far from where it was during the height of the euro-zone debt crisis.

Aside from Libya, Bahrain is also in focus, having cracked down on mainly Shi'ite Muslim protesters, a move that has angered Iran and raised tensions in the oil-exporting region. In Yemen, the president sacked the cabinet after deadly protests. Unrest shook Syria on Sunday and Saudis gathered to demand the release of prisoners.

OIL, JAPAN ARE KEY

The heart of the uncertainty for investors is what rising oil prices and Japan's earthquake, tsunami and nuclear breakdown will mean for the world economy and financial markets.

The initial reaction to Japan was that the global economy would cope quite well, seeing only 0.2 percent or so trimmed from global growth that was running above trend around 4.4 percent.

Cataclysmic events, including a nuclear disaster in Japan, uprisings in the Middle East and North Africa and the possibility of more currency market intervention will keep investors reacting to headlines.

"This is an extremely news-driven market. Investors are on the edge, and they are reacting to every headline they see," said Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research in Austin, Texas.

Many investors said the sudden increase in uncertainty had caused a corresponding rise in trading based on emotion rather than facts or fundamentals.

"Considering how the market's been moving recently, I wouldn't be surprised to see the S&P moving 1 to 1 1/2 percent both up and down in less than couple hours next week. That's how much volatility there is," said Ryan Detrick, a senior technical analyst at Schaeffer's Investment Research in Cincinnati, Ohio.

The volatility on Wednesday caused the S&P 500 to erase its gains for the year and then rebound more than 1 percent on Thursday.

Besides global developments this week, markets will get to respond to economic data on U.S. housing, gross domestic product and durable goods orders, but these may be relegated to second place behind traders' reaction to the latest headlines.

WALL STREET'S FEAR GAUGE

The CBOE Volatility Index VIX .VIX, Wall Street's so-called fear gauge, shot up nearly 30 percent on Wednesday when equities swooned after confusing statements from officials on the situation in Japan.

The gauge rose nearly 60 percent above its 50-day moving average, which has happened only a handful of times in the past 20 years.

Despite the 21 percent rise in the VIX for the week, traders bet the fear gauge would move higher. Call buying outpaced put buying on Friday, with about 232,000 calls and 111,000 puts, although both were below their average daily volume, according to options analytics firm Trade Alert.

The VIX, which often moves inversely to the S&P 500, measures the cost of hedges or protection investors are willing to pay against a fall in the S&P 500. The heavy call volume suggests expectations for more anxiety in the future.

"What makes this so difficult is that these issues are beyond the expertise of the market," said Russ Koesterich, an investment strategist at BlackRock Inc, which oversees $3.56 trillion.

"It's hard to say how severe the situation in Japan will get or how stable things will become in the Middle East, and that increases the downside risk."

Some market participants said the uncertainty was even more dramatic than the "flash crash" last May or the 2008 financial crisis.