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FOUR MONTHS after Saddam Hussein's army invaded Kuwait, the Mideast crisis still is being blamed for a lot of the troubles on Wall Street.

But despite the daily headlines blaming the latest Mideast development for the day's swing in the Dow Jones Industrial Average, some market watchers now say there are deeper, more powerful economic reasons that are driving the market.

"The underlying economic factors are certainly a big part of it, but the Mideast certainly is exacerbating it," says William H. Steinbrenner, vice president of First Albany Corp. in Buffalo.

Granted, the run-up in oil prices accounts for much of the jump in inflation since the crisis began, and a peaceful resolution could give the economy a boost by pushing the price of oil down sharply.

But other factors point to a continued weakening in the economy. Housing starts have fallen to their lowest level since 1982, while the nation's gross national product grew at a sluggish 1.7 percent during the third quarter. Many economists expect GNP to actually decline during the current quarter.

And the index of leading economic indicators, which is designed to predict economic activity six to nine months in advance, has declined for four consecutive months. A decline of three straight months often -- but not always -- is considered a sign that the economy is slipping into a recession.

So while the Persian Gulf crisis often gets the blame for triggering the slowdown in the economy, it really just exposed -- and exacerbated -- the weakness that already pervaded the stock and bond markets.

"The Gulf situation has really made more of a psychological crisis in the market than a financial one," says Rosemary Ligotti, senior vice president of Prescott Ball & Turben Inc. in Amherst.

That, however, doesn't mean investors are ignoring the Middle East situation. "People wonder, 'If I do something today are they going to start shooting tomorrow?' " says William P. Ripple, vice president and portfolio manager at Elias Asset Management Inc., a Buffalo money management firm.

Even so, the market seems to have discounted much of the Middle East turmoil, especially after the Dow gained 117 points -- 4.7 percent -- during November, while the Standard & Poor's index of 500 stocks rose 6 percent.

"Investors, it would appear, are looking more at the drop in interest rates; at hopes for a rebound in economic activity next year; and at the absence so far of a shooting war in the Persian Gulf, and less at the current slippage in the economy," says the Value Line Investment Survey.

Part of that is the belief that a quick resolution to the Persian Gulf crisis -- whether it's through war or peace -- would give the market a boost because investors hate uncertainty. "The financial markets can handle good news and they can handle bad news, but they don't like uncertainty," Ripple says.

That's one reason why the markets reacted strongly to the news last week that the United States would be willing to have Secretary of State James Baker meet with Iraqi officials to discuss the crisis, Ripple says.

And despite the chance that the resolution passed last week by the United Nations authorizing the use of force could lead to a shooting war, Ripple says the markets liked that development because it set a Jan. 15 deadline, reducing the chances that the crisis would drag on for months.

"The longer the situation in the Middle East drags out, the more we will be drawn to a recession," Ripple says. "That's why I think the markets welcomed the Jan. 15 deadline."

Amid all the uncertainty, though, many investors are sitting on the sidelines with a lot of cash, waiting to do some buying if a shooting war breaks out and the market falls sharply.

"I think a lot of this has been discounted, but the day war breaks out, I think the market is due for a heck of a tumble," Steinbrenner says.

As a result, "a lot of people are making a wish list of the companies that they want to buy" if the market drops further, Ms. Ligotti says.

And even if hostilities don't break out, Ms. Ligotti says that this month might be the time to do a little bit of buying because she expects stock prices to be under pressure as investors sell their poorly performing stocks so they can use the losses to cut their income tax bills.

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