Russian shares plunged by more than 6 per cent last night to their lowest level in 14 months as investors reacted to an outbreak of fierce fighting in South Ossetia.

BP also said it had been forced to slash oil production from its fields in Azerbaijan because of an unconnected attack in neighbouring Turkey on a pipeline that runs directly through the volatile Caucasus region.

As Russian troops were reported to have begun pouring into the disputed Georgian territory, Moscow’s RTS index slipped 119.30 points, or 6.5 per cent, to 1,723, while the Micex index lost 81.93 points, or 5.71 per cent, to 1,353. The rouble fell, while the cost of insuring Russian debt in the credit markets soared. Five-year spreads increased to 116-117 basis points from 102 on Thursday, meaning it would cost $116,000 to insure $10 million of debt.

Overall, the RTS has fallen 25 per cent since July 1. Since then, sliding oil prices, the battle for control of TNK-BP, Russia’s third-largest crude producer, and criticism of Mechel, the coalminer, by Vladimir Putin have all compounded the sell-off.

Carlo Gallo, Russia analyst at Control Risks Group, said the economic impact of the conflict was hard to gauge but was likely to delay Russia’s entry into the World Trade Organisation until “at least 2010” and would further undermine the attractions of Russia to foreign investors. Confidence has already been battered by the battle for ownership of TNK-BP.

BP was also forced to cut oil production by at least 400,000 barrels a day from its Azeri-Chirag Gunashli oil-fields in Azerbaijan after an explosion last week on the Baku-Tbilisi-Ceyhan pipeline (BTC), which pumps oil from the Caspian Sea through Georgia and to the Mediterranean. Kurdish separatists claimed responsibility for the attack, which took place in Turkey but the violence in Georgia has stoked concerns about the pipeline’s security.

A spokesman for BP denied that the conflict was having any significant impact on the BTC pipeline: “There is no reason why this should affect it.” BP was one of several partners in the pipeline, he added.

Meanwhile, a Moscow court yesterday ruled that Robert Dudley, chief executive of TNK-BP, had violated the Russian labour code. He was fined 500 roubles (£10.80) but escaped a three-year ban from doing his job.

Times Recommends

• ‘Lame duck’ fear for FSA as chief quits
• Storm over bailout of EU's most ailing economy
• Northern Rock to drop 100% savings guarantee