The Karachi index which fell by 6.56 per cent on Wednesday and 4.38 per cent on Thursday crashed by another 4.70 per cent to 1185.23 on Friday. ``The Pakistani markets are shallow... they are not that liquid and big as the Indian markets. The border skirmishes have taken place at a time when the Pakistan economy was struggling for a recovery. Sanctions after the nuclear explosion last year had crippled its economy,'' said a fund manager with a foreign investment firm.

"The prolonged tension is having a very negative impact on the market," said Tariq Mehmood Chaudhry, a trader with UBS Securities in Karachi. ``The stock crash shows that Pakistan economy is not in a position to absorb a full-scale war. It hasfallen to such an extent in a minor border clash,'' said another FII source.

However, the Pakistan rupee (PKR) remained steady on Friday in late interbank trading. In the interbank market the dollar stood at PKR 51.65. The unofficial, or kerb, rate for the dollar was PKR 53.18, down from PKR 53.28 Thursday. Bankers said that the reason for the rupee market to trade at a stable level is because the State Bank has directed the foreign and public-sector banks to trade within a preset band of the Pakistan rupee.

"This band is between PKR 51.50 to PKR 52.50, it is only when the dollar strengthens beyond PKR 53.00, the country's central bank panics and sells dollar into the interbank market," said a treasurer at a foreign bank.

The selling of dollars by exporters within three days has also helped the rupee to stay at a stable level in the interbank market, said a trader. The State Bank has asked exporters to sell foreign exchange proceeds within three days as against seven days previously.

The rupeecontinued to strengthen on the unofficial, or kerb market Friday. However, there are reports that various money changers were refusing to sell dollars on the open market owing to what they describe as the unreasonable band set by the Forex Association of Pakistan in consultation with the State Bank.

Analysts say that the band set for the kerb rate does not reflect the market sentiment and is likely to create speculation. But some traders disagree. "There is no shortage of dollars for genuine buyers like overseas travellers but we discourage dollar speculators," said Owais Kalia of Khanani and Kalia, money changers.