The euro hit a seven-week low against the dollar and looked set to weaken further as Italy's borrowing costs spiraled and Belgium's credit rating was downgraded. The dollar also climbed to a near eight-month high against the Swiss franc.
On Wall Street, stocks traded higher for most of an abbreviated session on hopes that "Black Friday," the traditional start of the US holiday shopping season, would support major retailers. But negative headlines out of Europe forced the market to concede gains just before the close.
Fewer participants in US markets after Thursday's Thanksgiving holiday also made it difficult to counter the move lower. Stocks in Europe and other major exchanges also suffered their worst week in two months, although European shares ended the day up following Wall Street's initial bounce.
Investors' worries intensified after reports that Greece was demanding harsh conditions from creditors on a proposed bond swap -- critical to reduce its debt and save the euro.
Banks represented by the Institute of International Finance agreed last month to write off the notional value of their Greek bondholdings by 50 percent to reduce Greece's debt ratio to 120 percent of its gross domestic product by 2020.
But Greece was demanding that its new bonds' net present value -- a measure of the current worth of future cash flows -- be cut to 25 percent, a far harsher measure than a number in the high 40s that banks had in mind, according to people briefed on the matter.
Greece aside, Belgium also made it to investors' watch-list after Standard & Poors downgraded the country's credit rating to AA from AA-plus, citing concerns about funding and market pressures.
A European Union conference in Strasbourg produced little to soothe the markets' fears. French President Nicolas Sarkozy and German Chancellor Angela Merkel, after talks with Italian Prime Minister Mario Monti on Thursday, agreed only to stop bickering in public over whether the European Central Bank should do more to resolve the crisis.
"The markets are going to continue to pressure the EU until they come up with a solution that is going to ease the crisis," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
For the week, the S&P was down 4.7 percent.
Commodities also fell broadly, except for US crude oil , which rose on the early strength in equities and stayed up even after stocks fell.
European stocks ended higher after falling in six previous sessions. The FTSEurofirst 300 index of top European was up 0.94 percent on the day but ended the week 4.6 percent lower.
Italian two-year government bond yields rose above 8 percent while the interest rate premium investors charge Italy to borrow over 10 years compared with equivalent German debt continued to rise despite reported buying by the European Central Bank.
World stocks, indicated by the MSCI All-World index were down half a percent on the day and down 5.3 percent on the week.
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