The euro fell to a 17-month low and world stocks fell on Friday after news France was notified of a credit downgrade and on talk that Standard & Poor's was set to cut ratings of several other euro zone countries.
The French finance minister said the country was informed that its credit rating with S&P was downgraded by one notch. The Italian news agency ANSA, citing unnamed government sources, said Italy has been notified of an impending downgrade by S&P.
Still, markets appeared to take the reports without too much worry. Stocks were down but were off their lows for the day.
The downgrade reports were the latest blow to the region, which has been mired in a debt crisis and appears headed for recession.
Things have not been improving in Europe. The timing is not perfect. It is sort of like kicking someone when they are down, said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts.
Euro zone government sources said S&P would cut several of the currency bloc's sovereigns and would make an announcement after New York markets closed.
The downgrades would not affect Germany or the Netherlands, the sources said. S&P declined to comment.
The euro tumbled to a low of $1.2623, its weakest level since late August 2010. The currency last traded at $1.2664, down 1.2 percent, according to Reuters data.
World stocks as measured by the MSCI World Equity Index <.MIWD00000PUS> slipped 0.6 percent after earlier falling more than 1 percent. Major U.S. indexes were down about 0.8 percent, and were off more than 1 percent earlier in the session.
The Dow Jones industrial average <.DJI> was down 100.01 points, or 0.80 percent, at 12,371.01. The Standard & Poor's 500 Index <.SPX> was down 11.12 points, or 0.86 percent, at 1,284.38. The Nasdaq Composite Index <.IXIC> was down 21.44 points, or 0.79 percent, at 2,703.26.
The European debt turmoil weighed on trading and corporate deal-making at U.S. bank JPMorgan Chase & Co
The pan-European FTSEurofirst 300 <.FTEU3> index of top shares fell 0.1 percent to close at 1,017.84 points.
ITALIAN DEBT SALE OVERSHADOWED
The S&P talk overshadowed a lacklustre sale of Italian debt.
Underpinned by a flood of European Central Bank (ECB) three-year loans to banks, Italy's three-year debt costs fell below 5 percent for the first time since September in an auction, spurring hopes it would make it through a stretch of looming refinancing.
But demand was weaker than a sale the previous day by Spain, the other major euro zone economy on the front line of the crisis.
U.S. bond prices rose as investors sought perceived safe-haven assets. The benchmark 10-year U.S. Treasury note was up 23/32, with the yield at 1.8445 percent.
German 10-year bond futures rose to a record while the risk premium investors charge on French, Spanish and Belgian debt widened in reaction.
But the widening of the French 10-year debt over German was in the range of 10 basis points, a minimal spike considering that the reaction could have been sharper.
A London trader said he did not believe that a flood of cash moving into the debt was keeping the spreads to a minimum. Instead, it reflected that there had not been a massive flight from the French bonds. This is not a panic move, the trader said
DOWNGRADE TALK ALSO WEIGHS ON GOLD, OIL DOWN
Gold fell as the dollar surged against the euro, sparked by the downgrade reports.
Spot gold was down 0.9 percent at $1,634.56 an ounce.
The dollar seems to be the main go-to safe-haven play at the moment, said David Meger, director of metals trading at futures brokerage Vision Financial Markets.
Oil prices also fell. Brent February crude was down 91 cents at $110.35 a barrel.
(Reporting by Caroline Valetkevitch, additional reporting by Richard Leong and Frank Tang in New York; and John Stonestreet, Richard Hubbard, Neal Armstrong and Marius Zaharia in London and Robin Emmott in Brussels; editing by Kenneth Barry)