By Josie Cox and Andrey Ostroukh

A run-up in geopolitical stress surrounding Russia and Israel has jolted markets, but investors' confidence that escalations are likely to remain contained is limiting demand for assets perceived to be safe.

Russian markets extended the week's losses Friday after Thursday's civilian passenger plane crash in the east Ukraine region of Donetsk. Russia's Micex index, which had already lost $4.4 billion in capitalization following a new round of U.S. sanctions, sank by 1.3% to its lowest level since May. The dollar-traded RTS Index also hit a May low, while the ruble dipped against the dollar and the euro. Adding to tensions, Israeli forces sent thousands of troops with tanks and armored vehicles into Palestinian territory late Thursday.

Typical safe-harbor assets such as gold, U.S. government bonds, and the yen rallied Thursday, and the U.S.'s S&P 500 stock index shed 1.2%--its biggest one-day drop in three months. But the shift into what appear to be the safest assets at times of unrest didn't extend into Friday.

"As geopolitical risks go, recent history would suggest that we may have to experience a truly cataclysmic event like 9/11 to see a trend reversal lower in the markets. This could mean that the latest developments in Ukraine and Israel may not be such a turning point, however tragic the loss of life has been," said Valentin Marinov, a currencies analyst at Citigroup in London.

"At a global level, [the plane crash] is going to be seen as a human tragedy more than a geopolitical crisis of longduration. The pressure on President [Vladimir] Putin can only increase and today at least uncertainty will dominate the region, but in North and South America or in Asia, the spillover should be limited," said Kit Juckes, a macro strategist at Société Générale in London.

Those sentiments were echoed by the buy-side too.

Philip Lawlor, the chief investment strategist at Smith & Williamson Investment Management in London, said that this incident demonstrated how "coldly analytical" financial markets can be.

"You always get a classic risk-off move, but for this to be a big catalyst you would have to see a massive escalation of tensions," he said, adding that while it is "a hideous incident on a human level, markets have an amazing ability to move on swiftly."

Early Friday, the yen was a little weaker on the day against the dollar, at Yen101.42, while the yield on U.S. 10-year government debt stood at 2.49%, also up on the Asian session. Yields rise as prices fall. Gold held on to some of Thursday's gains at $1,313.30 an ounce.

Airline stocks recorded substantial losses in early European trade, but moves were less pronounced by midmorning.

Shares in International Consolidated Airlines Group SA rose 0.4% while easyJet PLC fell a little less than 1%. Shares in Malaysia Airlines System Bhd dropped sharply, however, closing nearly 9% lower.

Elsewhere, the pan-European Stoxx Europe 600 waned 0.4%, while Germany's DAX, France's CAC 40 and the U.K's FTSE 100 all lost between 0.1% and 0.6%. Shares in Germany's Allianz SE, the main reinsurer of the crashed plane, fell 0.4%. That, however, was a far smaller fall than most other names on the DAX index.

In the U.S., the S&P 500 index was indicated recovering from Thursday's losses and rising 0.1% to 1,954.90. Futures, however, aren't necessarily reflected in moves after the opening bell.

Brent crude added 0.5% to trade at $108.39 a barrel.

Write to Josie Cox at josie.cox@wsj.com and Andrey Ostroukh at andrey.ostroukh@wsj.com

(END) Dow Jones Newswires

July 18, 2014 05:30 ET (09:30 GMT)

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