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The U.S. dollar climbed, world shares fell 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 provoked a rush for safe-haven assets.
World stocks, as measured by the MSCI index, dropped 0.85 percent and are now below where they began the year, having relinquished all their first quarter gains which were fuelled by the European Central Bank's creation 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 gold and oil and currencies like the euro and the Australian dollar were all heading for big weekly losses.
The FTSEurofirst 300 of leading European shares slid 0.9 percent to 972.69 by 0800 GMT, falling for a fifth day running and taking its weekly loss so far to five percent.
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 the extent that an opinion poll showing Greeks are returning to the 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."
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 $1.2649.
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 and Italian 10-year borrowing costs rose and are both now above the six percent level which investors view as a pivot point that could accelerate a climb to 7 percent, a cost of borrowing widely seen as unaffordable.
CATALOGUE OF YEAR LOWS
MSCI's broadest index of Asia-Pacific shares outside Japan fell 3 percent to its lowest this year and was on track for its worst weekly performance in nearly eight months with a loss exceeding 6 percent this week.
The index has shed more than 11 percent in May, wiping out all its gains for the year.
As risk aversion intensified, the CBOE VIX Volatility index - a gauge of investors' anxiety that measures expected volatility in the Standard & Poor's 500 index over the next 30 days - rose nearly 1 percent to close at a five-month high on Thursday.
Brent crude slipped below $107 per barrel on Friday 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, reversed course and edged down after posting its biggest daily rise in more than three months the previous session.
"We've got a bit of a perfect storm at the moment," Michael McCarthy, a markets strategist at CMC Global Markets in Sydney said.