The terrorist attacks on Manhattan on September 11 did more than destroy the twin towers of the World Trade Center and the lives of thousands who worked there. They also inflicted terrible damage on the twin pillars of the New York city economy.

"New York city's economy lives and dies with two industries: Wall Street and tourism. And we just lost both of them," says Gary Levy, partner at J.H. Cohn, the accounting and consulting firm.

As the horror of the tragedy recedes, city officials, entrepreneurs and analysts are beginning to think about its implications. Economists, used to examining the gradual influence of broad trends on the minutiae of the city's finances, struggle to express the magnitude of the shock.

"It's an earthquake and a hurricane put together and then some," says James Parrott, chief economist at the New York-based Fiscal Policy Institute.

The immediate emotional and business blow to the city's can-do economic spirit has been immense. Paul Bolles-Beaven, managing partner of Union Square Cafe, one of Manhattan's trendiest restaurants, said business collapsed in the wake of the attacks as customers stayed at home, huddled round the television.

Chuck Hunt, executive vice-president of the city branch of the New York State Restaurant Association, describes the situation as "akin to panic almost".

Hotels are considering closing whole floors to cope with the immediate drop in business. Joseph Spinnato, president of the Hotel Association of New York, says: "We're still in shock mode. People don't want to get on an airplane ... We have to get the airlines back into a normal working mode and get people back in here."

Keith Yazmir, communications director of NYC & Company, the city's official tourism marketing agency, says the immediate reaction was natural - and creditable: "If occupancy wasn't way down, if restaurants, hotels and Broadway weren't losing a ton of money this last week, I would be worried about the heart and soul of New York."

By the end of last week, business was beginning to pick up again. On Friday, the New York Mets played an emotional baseball game at Shea Stadium - the first in the city since the disaster. On Saturday, restaurants in Greenwich Village appeared busy - even those whose windows are plastered with pictures of the many thousands missing in the disaster.

Queues for Broadway shows wound twice round the discount ticket booth in Times Square.

"I do feel that what's beginning to happen is that New Yorkers are processing their grief and venturing out," said Mr Bolles-Beaven. "The biggest impact is out-of-town business."

The environment was challenging even before the World Trade Center attacks. Hotel occupancy was just below 80 per cent in the second quarter of this year, down from nearly 90 per cent a year earlier, as the weak national economy, strong dollar and worldwide economic slowdown took their toll. In the same three-month period, some 2,500 jobs were lost in the finance, insurance and property sectors.

The disaster of September 11 may even make some companies decide to flee Manhattan. If they choose to relocate to one of the other five boroughs - for example, Brooklyn, opposite the financial district - the damage to the city economy will be averted. But if they seek what may now be perceived as the safer havens of neighbouring New Jersey and Connecticut, city tax revenues will be undermined.

At the moment, the evidence from the maimed financial district is mixed.

Lehman Brothers on Friday agreed to lease five floors in a Jersey City building to house employees displaced from the World Financial Center, which was next door to the World Trade Center. Empire Blue Cross and Blue Shield, the health insurer that occupied 10 floors in the WTC's south tower, has temporarily moved its headquarters to Long Island and may permanently relocate to less expensive areas outside Manhattan.

However, other companies are determined to stay on the island. Thacher, Profitt & Wood and Sidley Austin Brown & Wood, both law firms, have already signed four- to six-year leases in midtown to replace their WTC offices. And important tenants of the World Financial Center, such as American Express and Merrill Lynch, have said they will return as soon as the damage is repaired.

For many businesses, however, the attacks have simply accelerated what was already a slow decline.

"The restaurants will become leaner . . . and those that were struggling to stay alive and dying a slow death, they're going to die a fast one," says Gary Levy.

Mr Yazmir of NYC & Company believes both tourists and business visitors will return. But economists fear that when they do, they may not spend as much as in the past because declining financial markets and economic downturn are cutting into consumer and business confidence.

While uncertainty reigns, Rudolph Giuliani, New York's mayor, is trying daily to inject optimism back into the economy, urging New Yorkers to get out and spend themselves out of their grief.

"We're going to take a hit, it will probably be a large one," he said on Wednesday, "but we're also going to survive, we're going to get through and there's a tremendous amount of help."

Mr Parrott predicts that "there'll be a powerful economic stimulus as the rebuilding effort begins" and $20bn of federal disaster aid adds to the insurance claims to feed the reconstruction of lower Manhattan. Renee Boicourt of Moody's, the credit-rating agency, told investors on a conference call last week to assess the impact on debt issued by the city: "Our general conclusion is that the city is down, but not out."

But help will come too late to save many ailing Broadway shows, restaurants and thousands of jobs linked to tourism and finance. In the meantime, New Yorkers will have to fall back on a combination of their own resources and an unaccustomed Blitz spirit.

As Mr Giuliani put it last week: "There's no question everybody is sad, we're mourning, we're hurt and we're going to hurt tomorrow, and the next day for a month, a year and maybe for ever - certainly for ever - but we have to be optimistic . . .We have a big problem to overcome, but overcoming the economic problems is the least of it."

Additional reporting by Alison Beard

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