U.S. stocks fell for a seventh straight session on Friday, leading global equity markets to their worst week in two months on fear that Europe's debt crisis is dragging on without a credible solution.
The euro hit a seven-week low against the dollar and looked set to weaken further as Italy's borrowing costs spiraled and Belgium's credit rating was downgraded. The dollar also climbed to a near eight-month high against the Swiss franc.
On Wall Street, stocks traded higher for most of an abbreviated session on hopes that Black Friday, the traditional start of the U.S. holiday shopping season, would support major retailers. But negative headlines out of Europe forced the market to concede gains just before the close.
Fewer participants in U.S. markets after Thursday's Thanksgiving holiday also made it difficult to counter the move lower. Stocks in Europe and other major exchanges also suffered their worst week in two months, although European shares ended the day up following Wall Street's initial bounce.
Trading remains cautious (since) the poor auction of German bonds mid-week raised concerns the debt crisis is spreading to Europe's core, said WhatsTrading.com options strategist Frederick Ruffy.
Investors' worries intensified after reports that Greece was demanding harsh conditions from creditors on a proposed bond swap -- critical to reduce its debt and save the euro.
Banks represented by the Institute of International Finance agreed last month to write off the notional value of their Greek bondholdings by 50 percent to reduce Greece's debt ratio to 120 percent of its gross domestic product by 2020.
But Greece was demanding that its new bonds' net present value -- a measure of the current worth of future cash flows -- be cut to 25 percent, a far harsher measure than a number in the high 40s that banks had in mind, according to people briefed on the matter.
Greece aside, Belgium also made it to investors' watch-list after Standard & Poors downgraded the country's credit rating to AA from AA-plus, citing concerns about funding and market pressures.
A European Union conference in Strasbourg produced little to soothe the markets' fears. French President Nicolas Sarkozy and German Chancellor Angela Merkel, after talks with Italian Prime Minister Mario Monti on Thursday, agreed only to stop bickering in public over whether the European Central Bank should do more to resolve the crisis.
The markets are going to continue to pressure the EU until they come up with a solution that is going to ease the crisis, said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
After a shortened session, the Dow Jones industrial average <.DJI> finished down 25.77 points, or 0.23 percent, at 11,231.78. The Standard & Poor's 500 Index <.SPX> was down 3.12 points, or 0.27 percent, at 1,158.67. The Nasdaq Composite Index <.IXIC> lost 18.57 points, or 0.75 percent, at 2,441.51
For the week, the S&P was down 4.7 percent.
I wouldn't be surprised if the S&P tested the 1,150 level next week when traders get back to their desks, said Kevin Kruzenski, head of listed trading at KeyBanc Capital Markets in Cleveland. The S&P last tested those levels on October 6.
U.S. Treasuries prices also ended down as investors saw a late-day rally from Wednesday pushing U.S. yields too low amid speculation the ECB may intervene in an effort to stem contagion in the troubled euro zone.
The benchmark 10-year U.S. Treasury note was down 23/32 in price, its yield at 1.96 percent versus Wednesday's close of 1.88 percent
Commodities also fell broadly, except for U.S. crude oil, which rose on the early strength in equities and stayed up even after stocks fell.
European stocks ended higher after falling in six previous sessions. The FTSEurofirst 300 <.FTEU3> index of top European was up 0.94 percent on the day but ended the week 4.6 percent lower.
Italian two-year government bond yields rose above 8 percent while the interest rate premium investors charge Italy to borrow over 10 years compared with equivalent German debt continued to rise despite reported buying by the European Central Bank.
German Bund futures also extended losses, reinforcing fears that debt contagion is starting to hurt the region's soundest economy. Bund futures hit a session low of 134.27, continuing to fall after a sharp sell-off in the wake of a weak 10-year bond auction on Wednesday.
World stocks, indicated by the MSCI All-World index <.MIWD00000PUS> were down half a percent on the day and down 5.3 percent on the week.
(Additional reporting by Anirban Nag, Kirsten Donovan, Atul Prakash and Neal Armstrong; Editing by Catherine Evans and Patrick Graham; Editing by Dan Grebler)