World shares slid and German borrowing costs hit record lows on Friday as a deepening Spanish banking crisis, uncertainty about Greece's future in the euro zone and lacklustre U.S. data bolstered safe-haven assets.
World stocks, as measured by the MSCI index, dropped 0.7 percent and are now below where they began the year, having relinquished all the first-quarter gains fuelled by the European Central Bank's injection of more than a trillion euros of three-year money.
That rally is now a distant memory as an ugly week for stock markets looked likely to end even uglier.
Across the board, riskier assets from commodities such as oil and currencies like the euro and the Australian dollar were all heading for big weekly losses.
While US stock futures pointed to a modestly higher open on Wall Street, following a sharp drop on Thursday, the FTSEurofirst 300 of leading European shares slid 0.6 percent to 975.71 by 1130 GMT, falling for a fifth day running and taking its weekly loss so far to nearly 5 percent.
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Benchmark 10-year German bond yields hit a record low of 1.396 percent and two-year yields also fell to their lowest-ever level at just 0.028 percent.
Investors were spooked by a ratings downgrade of 16 Spanish banks by Moody's Investors Service - although the move had been expected - and an unexpected contraction in U.S. regional factory activity reported on Thursday.
Sentiment has soured to such an extent that an opinion poll showing Greeks are returning to establishment parties which support the country's bailout had little impact.
If they vote that way in the June 17 elections, Greece's place in the euro zone would look more secure and the threat of contagion engulfing countries such as Spain would diminish.
"European markets are still in a very fatalistic mood because of Greece and possible contagion," said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500 million of assets.
"My view is that it is very likely that the ECB will step in before the situation spirals out of control, which will support the markets."
G8 MEETING
The safe-haven dollar rose against a basket of major currencies to hit a four-month high of 81.758, while the euro marked a four-month low around $1.2640 before recovering some poise.
Some traders said the euro would settle with investors wary of holding positions over the weekend when a G8 meeting of leaders of major industrial economies takes place.
No major policy decisions are expected but officials said U.S. President Barack Obama hoped to promote discussion on steps to resolve the euro zone crisis.
Greece has captured the headlines in recent days but the much larger Spanish economy poses an equal threat.
Spain's banks, saddled with bad loans after a property boom collapsed, may need a bailout that would strain Madrid's already stretched finances and possibly require an international bailout regardless of any contagion threat from Greece.
Spanish 10-year yields are well above the 6 percent level which investors regard as a pivot point that could accelerate a climb to 7 percent, a cost of borrowing widely seen as unaffordable.
The cost to insure Spanish government debt against default hit a record high after the mass Moody's downgrade of Spanish banks.
Emerging stocks hit their lowest since December 2011 after falling 7 percent this week, and were on track for their ninth consecutive week in the red, the longest loss-making stretch since 2008.
Japan's Nikkei dropped 3 percent to log a seventh consecutive week of losses and MSCI's broadest index of Asia-Pacific shares outside Japan fell 2.5 percent. It has shed more than 11 percent in May, wiping out all its 2012 gains.
Brent crude slipped below $107 per barrel to its lowest in 2012 as the euro zone crisis and weak U.S. data raised fears of a global slowdown that could dent oil demand.
Gold, the traditional safe haven, rose towards $1,590 an ounce, building on the previous session's hefty gains.
"We've got a bit of a perfect storm at the moment," Michael McCarthy, a markets strategist at CMC Global Markets in Sydney said.
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