MOSCOW (AFP) -- A few weeks ago, Russia seemed on an unstoppable roll as investors flocked to one of the world's fastest-growing economies, but a sudden escalation of the state's conflict with oil giant Yukos has jolted confidence.

President Vladimir Putin prided himself on bringing stability after the chaotic post-Soviet era, as his administration attracted Western capital and incited Russians to repatriate funds stashed abroad.

Now in its fourth year of consecutive growth, Russia's gross domestic product expanded 6.5 percent in the first nine months of 2003, almost on a par with China.

But the spectacle of prosecutors going after the country's largest oil group, jailing its chief executive on fraud charges and freezing nearly half its shares has provoked deep unease in business circles.

"We believe that the notion of political stability, one of the cornerstones of the Russian investment case over the past few years, has been dealt a substantial if not lasting blow," the Aton brokerage warned in a research note.

Yukos, considered the first Russian company to gain an international reputation for transparency and good corporate governance, is in the final stages of a merger with rival Sibneft that would create the world's fourth-largest private oil and gas producer.

In a measure of alarm at the investor fallout, Putin met with the heads of top Russian and Western investment banks Thursday shortly after prosecutors impounded a 44-percent stake in Yukos owned by chief executive Mikhail Khodorkovsky and his allies.

Although Putin assured them the prosecution of Khodorkovsky, the second major Yukos shareholder to be jailed since July, was an "isolated event," he also said Russian authorities would pursue other businessmen who had broken the law.

This only renewed fears of a broader campaign against the "oligarchs," the club of billionaire Russian moguls who built up fortunes virtually overnight in the 1990s by snapping up state companies for bargain prices in disputed conditions. "The accusations against the head of Yukos ... can be made against any Russian businessman," the Vedomosti business daily said Friday. "This means the shares of any company can be impounded by the prosecutors. And maybe nationalized."

Foreign investors are not expected to desert Russia -- the second-largest oil exporter after Saudi Arabia -- which has become a magnet for Western majors looking to replenish dwindling reserves, but deals are already being delayed.

The Financial Times reported that US oil giants ExxonMobil and ChevronTexaco had halted talks on the purchase of a major stake in YukosSibneft after Khodorkovsky's arrest.

The British business daily also reported that French food giant Danone had postoponed its planned 900-million-dollar takeover of Russian dairy products group Will-Bill-Dann. British oil giant BP, which sank 7.7 billion dollars into a joint venture with Russian oil producer TNK this year, shrugged off the Yukos crisis however and insisted it was in Russia "for the long term."

And Moody's, which this month upgraded Russia's credit rating to investment grade, citing strong economic growth on the back of high world oil prices and responsible financial policy that has seen bank reserves swell and foreign debt paid down, reaffirmed its decision on Friday.

But a greater risk is that massive capital flight will resume, starving the Russian economy of domestic investment which has been a vital engine of growth in recent years.

For the first time since the collapse of the Soviet Union, Russia recorded a net capital inflow of 2.3 billion dollars in the second quarter of this year. In the third quarter, an estimated seven billion dollars fled the country.

"This is not only about foreign oil interests, it's about Russian money coming back or not coming back. Stability and security of property rights are the key," Christof Ruehl, the World Bank's chief economist in Russia, told AFP.

"Putin's reforms were seen as successful because there was confidence and Russian companies started to repatriate their profits. The risk is that even if the government pursues reforms, the confidence will no longer be there," said Natalya Orlova, an analyst at Alfa Bank.