NEW YORK (CNN/Money) - As concerns of a possible U.S.-led attack on Iraq continue to plague U.S. financial markets, wounded investors have been sitting on the sidelines -- fearful they might get hurt if they jump back into the game.

This investor paralysis has resulted in extremely light trading volume and a process of slow bleeding on Wall Street, with a nervous market that reacts sharply to any news or rumor.

"We are basically being held up by geopolitical events," said Michael Carty, principal at New Millennium Advisors. "Many investors have just taken to the sidelines.

This has been especially true for the Nasdaq, the stock market laden with a good chunk of once high-flying technology stocks that have languished for the past three years. Average daily trading volume on the Nasdaq sank 18 percent in January compared with the first month of 2002. In February, it plunged a whopping 28 percent.

To make things worse, average daily trading volume on the Nasdaq fell 16 percent in February from the month before.

"Structurally, the way industries are trading Nasdaq stocks has changed, and trading has contracted because of that pulldown," said Art Hogan, chief market analyst at Jefferies & Co. "Fundamentally, the slowdown is the classic prelude to a war. The tracking of average daily volumes is just ridiculous -- but understandable."

The picture was marginally better on the New York Stock Exchange, where average daily trading volume rose 3 percent in January from a year earlier, but fell 3 percent a month later, compared with February of 2002. On a month-to-month basis, the number of stocks traded on the NYSE in February slipped 9 percent from January.

Iraq developments and a snowstorm that blanketed the East Coast hit volume especially hard during the third week of February. The markets were closed Monday, Feb. 17, for the Presidents Day holiday, and the following two trading days yielded severely lightened action.

Feb. 19 claimed the lowest volume of the year thus far for the NYSE, with fewer than 1.1 billion shares changing hands. The average daily volume in February was 1.336 billion. Last year, an average of 1.382 billion shares traded daily in February on the NYSE.

This compares with an average of 1.475 million a day in January, which jumped from the 1.426 million shares a day, on average, that traded in the same month the previous year.

Traders said the constant new developments in the Iraq crisis, coupled with other geopolitical concerns, including North Korea's reactivation of its nuclear weapons development program, have kept investors away from putting money into a volatile stock market. Such low volume tends to exaggerate the market's moves to the upside or the downside, but these huge rallies and selloffs tend to dissipate fairly quickly.

"There is a lack of consensus on where the market is trading," Hogan said. "There are low-volume rallies and low-volume selloffs. If we resolve this [Iraq situation] and start to get clarity, I do think volume will pick up."

While the markets have been extremely jittery in the past few months and investors may not be buying -- they're not selling too much either. Market analysts said the "wait and see" approach will last until some conclusion, whatever it may be, is found for the Iraq problem. A pickup in volume is to be expected once that happens, they said.

"With the Iraq situation resolved, I believe the market is likely to take off. I think you'll see volume pick up dramatically as soon as the Iraq situation clears up," Carty said.