The euro rose and European shares reversed losses on Friday on reports that the European Central bank may start lending funds to the IMF to help struggling Eurozone countries.
World stocks, however, dipped to near four-week lows, reflecting the fragile sentiment in the market with investors still worried that European policymakers are not acting urgently enough to resolve the debt crisis.
Adding to the growing sense that quick action is needed, ECB President Mario Draghi told Eurozone governments to act swiftly to get their beefed-up rescue fund into gear, expressing exasperation at a lack of progress so far.
The fund is supposed to take over from the central bank the buying of bonds to support struggling Eurozone economies, but efforts to boost its firepower have been snarled up by wrangling between Germany and France on the best way to do it.
The ECB intervened in the bond market a day after Spain's borrowing costs at a sale of 10-year debt soared to their highest in the euro's history, as the crisis now entering its third year increasingly threatens Europe's bigger economies.
Italian and Spanish government debt yields fell, but they held close to unsustainable levels as contagion fears and money market stress raised the pressure for policymaker action.
The euro was last up one percent against the dollar at 1.3600, extending earlier gains on speculation that the ECB, which has so far refused to be the lender of last resort, would be willing to go through the IMF to help struggling countries.
Officials told Reuters on Thursday that Eurozone and International Monetary Fund officials have discussed the idea of the ECB lending to the IMF, to provide the fund with sufficient resources for bailing out even the biggest euro zone sovereigns.
There are stories circulating about the ECB going via the IMF to lend money to countries that need help, said Tom Levinson, FX strategist at ING. The ECB would have to be involved in any potential solution for it to be credible so I would expect that to give the euro a bit of a lift.
Whether it will persist or not is highly debatable. This is a knee-jerk euro reaction and I think it will struggle to hold around this level. Negative headlines will remain in the ascendancy for the next few weeks.
European stocks were last 0.2 percent up but the pan-regional index was still on course to end the week down.
The banking sector also reversed losses, with the STOXX Europe 600 Banking Index up by a similar amount. It has lost more than 36 percent in 2011, as banks take writedowns on exposure to Eurozone peripheral debt.
The focus has very much moved toward the core of Europe, away from the periphery. Italy's in question. France is in question, Daniel McCormack, strategist at Macquarie, said.
It really has pushed the sovereign crisis into a much more dangerous phase. You should have some kind of overweight in defensives, and avoid financials.
The MSCI world equity index was down 0.1, near its lowest levels since Oct. 20 and falling for a fourth consecutive day.
Investors remained on edge given signs that the crisis was spilling over to money markets, with banks refraining from lending, causing liquidity to seize up.
Euro/dollar three-month cross-currency basis swaps, the premium banks pay to swap euros for dollars, was at -134 basis points, the most since the 2008 financial crisis.
Other safe-haven currencies such as the Swiss franc and the yen outperformed the dollar. The greenback hit a 2-1/2 week low against the yen of 76.68 and fell one percent against the Swiss franc to 0.9116.
Generally safe havens are doing very well at the moment and once you've filled up your exposure on dollars, the yen is the next one in line irrespective of whether you might be worried about intervention, said Adam Myers, senior FX strategist at Credit Agricole in London.
Brent crude oil rose more than a dollar to over $109 a barrel, helped by a weaker dollar, after posting steep losses in the previous session, but analysts and traders said the risk remained to the downside given the economic weakness in Europe.
Brent crude was last up 1.3 percent at $109.62 a barrel, after closing down $3.66 in the previous session. U.S. crude oil futures were up 1.1 percent at $99.93.