Shock waves from the relatively small Greek economy reverberated around the world, as investors worried about the chances of other European governments facing a similar debt crisis.
Group of Seven finance ministers said they would discuss the Greek bailout later on Friday after Federal Reserve officials expressed concern and the Whitehouse said President Barack Obama was watching developments closely.
Euro zone leaders also meet later in the day in a special summit, while Germany's parliament is to vote on the 110 billion euro bailout ($140 billion) later in the day.
Asian stocks sank on Friday after the Dow Jones industrial average plunged at one point on Thursday by nearly 1,000 points, a flashback for some to the mayhem in world markets during the global credit crunch.
The Greece debt crisis is reminding investors of what happened after Lehman Brothers' collapse, said Kazuhiro Takahashi, general manager at Daiwa Securities Capital Markets.
A failure by one financial institution ended up triggering a ripple effect on the global economy.
The Greek parliament backed an austerity plan on Thursday, but selling accelerated across markets overnight after the European Central Bank said it had not considered buying government bonds to ease Greece's debt crisis. Some investors had hoped it would be more active in calming markets.
The euro steadied in Asia just under $1.27 after the United States said the Group of Seven finance ministers would discuss Greece in a telephone call.
However, it was nursing significant losses after a mauling on Thursday took it to 14-month lows of $1.2510. Japan's Nikkei skidded nearly 4 percent, its worse day in slightly over a year. The MSCI index of Asia-Pacific shares outside Japan slumped 2.4 percent, its biggest daily fall in three months.
This brief rerun of the darkest days of 12-24 months ago is a real confidence killer for leveraged investors, not to mention the rest of us, said Rory Robertson, a strategist at Macquarie in Sydney.
The real worry is that the growing risk aversion via growing problems in Europe is driving up funding costs across the global financial system.
POLITICIANS VS MARKETS
German Chancellor Angela Merkel declared that governments were locked in a battle with financial markets, a confrontation she and her fellow politicians were determined to win.
To some degree this is a battle between the politicians and the markets, she said in a speech in Berlin. But I am firmly resolved -- and I think all of my colleagues are too -- to win this battle.
But Japan's finance minister said that G7 finance ministers were unlikely to discuss the possibility of joint intervention in markets to support the euro.
Japan was unlikely to be asked to do much beyond expressing support for EU and IMF efforts to rescue Greece, the country's finance minister, Naoto Kan, said.
I don't think this call is about joint intervention. I don't think the G7 is moving toward joint intervention to support the euro, Kan said in a news conference.
I don't want to speculate about what else will be discussed on the call. The EU and the IMF have agreed to help.
Federal Reserve officials said the European turbulence could have repercussions for the United States, while the White House said President Barack Obama was closely watching developments.
Investor concern over Greece was heightened by extraordinary volatility on Wall Street.
U.S. stocks closed down more than 3 percent, but at one point all three major indexes rapidly plunged more than 9 percent. The Dow posted its biggest intraday point drop ever, falling almost 1,000 points.
The sudden plunge wiped nearly $1 trillion off U.S. equity market valuations.
While fears of financial contagion from Europe already had Wall Street on a razor's edge, traders suspected a fat finger trading error may have triggered the sudden plunge.
European markets have been nervous for weeks, but a slide accelerated on Thursday after ECB President Jean-Claude Trichet failed to offer any new measures to ease Greece's debt crisis.
Nothing short of a sensational announcement can help the euro at this point. And that certainly did not come from Trichet, said Kathy Lien, a director for currency research at GFT Forex, in New York.
DEFAULT OUT OF THE QUESTION
In Athens, parliament approved the government's 30 billion euro ($40 billion) austerity bill on Thursday, imposing years of hard measures in return for the 110 billion euro joint rescue by the European Union and the International Monetary Fund.
Germany will bear the brunt of the bailout and the country's parliament is expected to formally approve the plan on Friday.
Trichet reiterated the ECB's backing for Greece's savings plans and dismissed the prospect of any euro zone debt default.
Default is, for me, out of the question, he said.
European Council President Herman van Rompuy, who will chair a euro zone summit on the crisis on Friday, was the latest top EU official to try to erect a verbal firewall, saying the situation of Portugal or Spain had nothing to do with Greece.
What I now see are totally irrational movements on the markets set off by unsubstantiated rumors, he said.
Yield spreads widened for Portuguese, Spanish and even Italian bonds over fears that weaker euro zone countries were at risk of being sucked into the debt crisis.
Policymakers' attempts to talk down the risk of contagion and scare off speculators had little impact on traders unimpressed by the slow EU response to the crisis.
German Finance Minister Wolfgang Schaeuble said any restructuring of Greek debt would cause exactly the kind of conflagration that we could no longer control.
We are in a really fundamental crisis, the stability of the euro is really at stake, he added.
(Additional reporting by Noah Barkin in Athens, Gernot Heller in Berlin, Tim Heritage in Brussels, George Matlock in London, Pedro Nicolaci da Costa in Richmond, Virginia; writing by Bill Tarrant; editing by Neil Fullick))