By Carolyn Cohn

The U.S. dollar steadied on Friday but stayed on course for its biggest weekly fall in 24 years, while stocks dropped, on concern about the inflationary effects of a Federal Reserve plan to buy government debt.

Analysts said the Fed's radical decision to buy $300 billion of longer-term debt and vastly expand its balance sheet beyond the current $2 trillion meant more and more U.S. dollars would be created, straining demand.

People have some concerns about the potential inflationary effects of what the Federal Reserve has done. If everything is implemented, then the balance sheet of the Federal Reserve will have gone up by about $3,000 billion ($3 trillion), said Luc Van Hecka, chief economist at KBC Securities.

That's a lot of money and it's not unusual that people tend to see this as a threat to price stability somewhere in the future.

The dollar steadied against a basket of currencies <.DXY> overnight but was still down more than 5 percent on the week after falling sharply on Wednesday and Thursday.

That put it on track for the steepest fall since the 1980s Plaza Accord, when large economies agreed to a formal depreciation of the dollar.

The euro has risen more than 6 percent against the dollar this week, eyeing its sharpest weekly gain since inception in 1999. It was trading at $1.3684 at 0842 GMT, up 0.15 percent on the day and near two-month highs set on Thursday.

A senior German lawmaker told Reuters that euro zone countries have agreed a rescue plan to prevent members of the currency bloc going bankrupt and will probably use it, with Ireland and Greece the top candidates for aid.

The dollar was steady against the yen at 94.46, with Tokyo markets shut for a holiday.

World stocks, as measured by MSCI's all-country index. dropped 0.43 percent to 200.23 <.MIWD00000PUS>, after hitting 1-month highs in the previous session.

The pan-European FTSEurofirst 300 index <.FTEU3> of top shares dropped 0.74 percent to 709.93, off recent three-week highs. Friday is a triple witching day of futures and options expiries, which typically adds to market volatility.

Stocks rose earlier this week as the Fed's plan to inject a combined $1.15 trillion into the U.S. financial system improved battered confidence in banks.

But the Fed's approach also creates uncertainties for business and investors, mainly in the form of a weakening dollar and prospects of surging inflation once the economy starts recovering.

Forward-looking inflation concerns are likely to play out as a dollar negative, said strategists at UBS in a client note.

The more aggressive stance taken by the Fed indicates that the dollar will also lose out even against the other members of the quantitative easing club -- sterling, yen and Swiss franc.

Euro zone government bond futures rose 10 ticks to 124.06, after posting their largest one-day gain since 1996 on Thursday, tracking Treasuries on the Fed debt announcement.

Prices for commodities rallied this week as the weakening dollar made them cheaper for investors, while others looked for a hedge against potential inflation.

Oil pared gains on Friday, dipping 21 cents to $51.42 a barrel, but gold rose to $961.80 an ounce.

(Additional reporting by Atul Prakash; editing by Patrick Graham)