World stocks tumble on euro zone debt fears

European stocks fell again on Friday despite German approval of a euro zone rescue package, as markets remained unconvinced the aid would resolve the debt crisis. The euro, however, found support from short covering. Wall Street was also set to open lower, after plunging nearly 4 percent in the previous session. In the general flight to safety bund futures extended their gains, up 28 ticks on the day to 128.59, with the German 10-year government bond yield hitting a record low at 2.656 percent.

"We are heading into the U.S. session here and the markets want to be better bid. The market is just anticipating more risk aversion trades ... People are still shedding risk and risk assets," a bond trader said. World stocks as measured by the MSCI All-Country index were down 0.41 percent, with the more volatile emerging markets component down 0.38 percent.

The euro continued to benefit from hedge funds scrambling to cover short positions and rose 0.32 percent to $1.2501. Germany's lower house of parliament approved a law allowing the country to make the biggest contribution to a 750 billion euro emergency debt package to help protect the euro, but markets remained troubled by what they perceive as poor co-ordination amongst European members in tackling the crisis.

European finance ministers were meeting later on Friday to discuss changes to budget rules to prevent another Greek-style debt crisis. The FTSEurofirst 300 index of top European shares was down 2.2 percent, extending sharp falls over the previous two sessions after Germany's decision to ban naked short selling on some assets raised fears about a lack of coordination between European policymakers.

The UK's FTSE 100 slipped below the key 5,000 mark for the first time since November 2009. "Valuations have cheapened, but the underlying fundamental issues have not been addressed and will continue to dog risk asset markets in the months ahead," said analysts at RBC Capital Markets in a note. "The lack of political cohesion within the euro zone is becoming more apparent by the day and this can only undermine risk appetite and conviction in the longer-term outlook for investing in the region."

FINANCIALS HAMMERED

Energy shares were among the biggest losers on concerns that any setback to economic growth would hit demand for oil as the oil price fell towards $70 a barrel. Financial stocks also took a hammering following Thursday's approval by the U.S. Senate of a sweeping Wall Street reform bill. Earlier in Japan, the Nikkei closed down 2.5 percent and lost 6.5 percent on the week, its biggest weekly drop in more than a year.

The euro, meanwhile, was also supported by rumours of possible central bank intervention to prop up the ailing currency. "The intervention threat doesn't have to feel realistic, when the market is in an extreme position even just a muttering (of intervention) can cause a reaction," said Daragh Maher, senior currency analyst at Credit Agricole CIB. The U.S. dollar was up 0.42 percent to 85.92 against a basket of currencies as investors sought safe-haven assets. U.S. Treasuries also benefited.