Euro-zone debt worries spread across the globe

All eyes were on Lisbon, where parliament was due to vote on a regional financing bill markets see as a crucial test of the government's ability to curb public spending, which swelled across the 16-nation bloc in response to the economic crisis.

The government in Lisbon says the opposition-led bill, which was approved in a committee vote on Thursday, would hamper its ability to cut a budget deficit expected to total 8.3 percent of gross domestic product (GDP) this year.

Alongside Greece and Spain, Portugal is one of a handful of euro bloc countries that face intense pressure to get their public finances in order and calm markets which are worried about the risks of a sovereign default.

Analysts are no longer discounting the possibility that a smaller member of the bloc such as Greece could be pushed out, though most believe monetary union will survive.

Reflecting the scope of the concerns, investors in the United States and Asia shed risky assets overnight and moved into U.S. Treasuries and Japanese yen, both seen as safe havens.

The market is closely watching each country's ability to pay its debts. If the faith is lost, rates will go up significantly, said Erkki Liikanen, a member of the European Central Bank's Governing Council.

The euro tumbled below $1.37, its lowest level since May 2009. It also slumped against other safe-haven currencies like the Swiss franc, forcing the Swiss National Bank (SNB) to take the unusual step of intervening in the market.

Greek stocks were down 2.8 percent in early trading, while Portuguese and Spanish shares shed about 2 percent after tumbling 5 to 6 percent on Thursday.

The cost of insuring Greek, Portuguese and Spanish government debt against default shot up to record highs and yields on the three countries' bonds compared with benchmark German Bunds also rose sharply, a sign of growing investor unease with the fiscal divergences within the euro currency bloc.

There is now significant downside pressure on global indexes, with fear spreading that the situation in Greece could creep into other weaker European economies, said Owen Ireland, an analyst at ODL Securities. Confidence is extremely brittle.

GREECE TRIES TO REASSURE

Greek Prime Minister George Papandreou, on a visit to the Indian capital New Delhi, sought to reassure skeptics about his government's ability to push through austerity measures and bring yawning debt and deficit levels under control.

I can understand the doubts but that's why we have to prove (ourselves). We will credibly apply this program, Papandreou said.

Greece has pledged to reduce its budget deficit by 4 percentage points to 8.7 percent of GDP this year, down from 12.7 percent in 2009.

Earlier this week, the European Commission conditionally approved a three-year Greek plan to cut its deficit, bringing temporary relief.

But markets still have doubts about Papandreou's ability to push through his program amid mounting threats of social unrest in a country with a history of violent protest.

Greek tax officials kicked off a series of strikes against the government's austerity plan on Thursday and a wider public sector strike is scheduled for February 10.

The threat of unrest has also risen in Spain, where criticism of Prime Minister Jose Luis Rodriguez Zapatero is on the rise.

Spanish unions said on Thursday they would hold protests and the opposition has threatened to hold a vote of no confidence in parliament -- a step which could topple the government if successful.

The government was due to detail its labor reforms on Friday. Unemployment in Spain, whose economy has slumped since the bursting of a construction bubble, is nearing 20 percent.

(Reporting by Andrei Khalip in Portugal, Brian Love in Paris, Terhi Kinnunen in Helsinki; Abhijit Neogy and Manoj Kumar in New Delhi; Writing by Noah Barkin, editing by Tim Pearce)