The euro and world stocks dropped on Friday after news reports of possible credit downgrades of euro zone countries and a lackluster sale of Italian debt.
U.S. bond prices and the dollar rose as investors sought safe haven, a day after the euro hit its highest in a week on strong demand at auctions for Italian and Spanish government debt.
A senior euro zone government source said credit rating agency Standard & Poor's is set to downgrade several euro zone countries, not including Germany.
French television channels, citing a government source, said Standard & Poor's downgraded France's credit rating.
S&P declined to comment on the reports.
Underpinned by a flood of three-year loans to banks from the European Central Bank, Italy's three-year debt costs fell below 5 percent for the first time since September, spurring hopes it would be able to make it through a looming refinancing hump.
But the tender raised less than half the 10 billion euros secured the previous day at far lower yields by Spain, the other major euro zone economy on the front line of the debt crisis.
Clearly the fundamentals have deteriorated and several of the agencies have warned of this ... I think there's a very good risk (of downgrades) in the coming few weeks, said Mike Moran, director and senior foreign exchange strategist with Standard Chartered.
The theme is that we're shifting away from pressure from the southern peripheral economies and it's now creeping, it has been creeping, toward the northern European economies now as well over the past couple of months and this is another extension.
The debt turmoil weighed on trading and corporate deal-making at U.S. bank JPMorgan Chase (JPM.N), which began the financial reporting season across the Atlantic with a year-on-year drop in quarterly income. Shares of JP Morgan Chase were down 3.4 percent at $35.58.
The euro was last down 1.4 percent at $1.2648 against the U.S. dollar.
World stocks as measured by the MSCI World Equity Index .MIWD00000PUS were down 1.4 percent, while U.S. stocks were down nearly 1 percent.
The Dow Jones industrial average .DJI was down 121.32 points, or 0.97 percent, at 12,349.70. The Standard & Poor's 500 Index .SPX was down 12.65 points, or 0.98 percent, at 1,282.85. The Nasdaq Composite Index .IXIC was down 20.77 points, or 0.76 percent, at 2,703.93.
The FTSEurofirst 300 .FTEU3 index was down 0.6 percent.
Investors also headed back to the safe havens of core government debt. The benchmark 10-year U.S. Treasury note was up 20/32, with the yield at 1.8566 percent, while German Bund futures hit a new record.
The European Central Bank struck a cautiously optimistic note on the euro zone's outlook on Thursday and left the door open to further interest rate cuts.