Nervous investors scrambled to protect their assets, paying higher prices for options ahead of the weekend as European debt woes weighed on the prospects of global growth.

Wall Street stocks sank on Friday after the surprise resignation of European Central Bank executive board member Juergen Stark brought concerns over the region's debt back to the fore.

The risks that an external shock could tip the U.S. economy into a recession have increased, leaving investors clamoring for protection in the U.S. options market, said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut.

The rout in U.S. stocks sent the CBOE Volatility Index, Wall Street's favorite barometer of investor sentiment known as the VIX <.VIX>, to a high of 40.59. It currently stood at 40.48, a gain of 17.95 percent late in the session.

Investors were on edge on fears of negative headlines from the Eurozone over the weekend.

The European crisis seems to be worsening by the day, said TD Ameritrade chief derivatives strategist J.J. Kinahan. This is causing much anxiety among investors who don't want to take a risk of leaving their positions unprotected in a weekend that could see breaking news. he said.

Furthermore, credible but unconfirmed terrorism threats against New York City and Washington just ahead of the 10th anniversary of the September 11 attacks prompted investors to sell equities ahead of the weekend.

The VIX, a 30-day risk forecast of stock market volatility conveyed by S&P 500 index <.SPX> option prices, typically moves higher when the S&P benchmark suffers significant declines.

Recent attempts for a rebound in U.S. stocks have failed to deflate the value of the VIX, which has remained elevated above a 30 reading since August 4. The last time the VIX hit the 40 level was on August 26, when it hit an intraday high of 43.84.

Still, a VIX above 40 reflects renewed concerns about the problems in Europe, the risks to the global economy and uncertainty about future earnings, said WhatsTrading.com options strategist Frederic Ruffy.

Fear is elevated. But Ruffy noted it is not the panic extremes seen last month, when options volume on U.S. exchanges hit new records and the VIX notched 15-month highs of 48.

People are worried about the weekend. Normally we would see a dampened VIX reaction on Friday as traders price in weekend time decay. But we are not seeing that today. said Chris McKhann, analyst at Web information site optionMonster in Chicago.

(Reporting by Doris Frankel; Editing by Diane Craft)

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