Europe shares fall as global share sell-off continues

European markets have again fallen sharply amid a crisis of confidence in the ability of eurozone leaders to deal with debt problems.

In volatile trading, the main indexes, including the UK's FTSE 100 and Germany's Dax, fell by up to 4%.

European Commissioner Olli Rehn said he thought the movements were "unjustified" and "incomprehensible".

However, markets began to stabilise following better-than-expected jobs data in the United States.

But analysts suggested the relief may only be temporary.

"When markets get into one of these negative sentiment spirals, it will take more than one good set of numbers to offset that," Nomura economist Peter Westaway told BBC News.

The slow economic recovery in Europe and the US has been one of the key factors behind the market uncertainty in recent days.

Speaking to reporters, Mr Rehn, the EU's Economic and Monetary Affairs Commissioner, tried to assure markets by saying the movements were "not justified by the economic fundamentals", particularly in Italy and Spain, the latest focus of investors concerns.

"The political will to defend the euro should not be underestimated," he added.

He stressed that measures to improve the scope and effectiveness of the 440bn-euros rescue fund, the European Financial Stability Facility (EFSF), agreed last month, should be in place by September.

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Media captionOllie Rehn says the Commission is 'satisfied' with 21 July agreement

On Thursday, European Commission President Jose Manuel Barroso called on eurozone countries to approve those changes as soon as possible, but also to consider expanding the fund further.

Leaders to talk

Mr Barroso also said that authorities were failing to prevent the sovereign debt crisis from spreading. "We are no longer managing a crisis just in the euro-area periphery," he said.

This sparked fears that Italy and Spain might become engulfed in the crisis which has led to Greece, the Irish Republic and Portugal already being bailed out.

In a morning of sharp fluctuations on Friday, shares in Milan and Madrid fell back but then recovered following rumours that the European Central Bank is preparing to buy Spanish and Italian bonds to try to help those countries.

The European Central Bank was said to have bought up bonds issued by the Irish and Portuguese governments on Thursday. But traders were concerned that the bank did not appear to have intervened to help Spain and Italy, whose borrowing costs have risen significantly recently.

On Friday, the head of the Belgian central bank and ECB governing council member, Luc Coene, said that a buy-back of Italian and Spanish debt was possible - if Rome and Madrid pressed ahead with economic reforms.

The gap between German bonds - the safest in Europe - and Spanish and Italian debt again reached a record since the euro was introduced in 1999.

This latest crisis of confidence has come at a time when many of Europe's leaders are on holiday.

German Chancellor Angela Merkel is due to hold a telephone conference with French President Nicolas Sarkozy and Spanish Prime Minister Jose Luis Rodriguez Zapatero later to discuss the latest problems in the eurozone.

UK Prime Minister David Cameron, who is on holiday in Italy, discussed the financial situation with the governor of the Bank of England, Mervyn King, on the telephone earlier.

'Under pressure'

Concerns about the slow economic recovery in Europe and the US is also in investors minds, as sluggish growth will make it harder to pay off debts.

"Fear is the major theme," David Cohen of Action Economics told the BBC.

"People were cautiously optimistic that we would get back on track in the second half of the year. But with the US recovery stalling and the possible repercussions for the global economy, stock markets have been under pressure for a while."

The long-running political battle over the US budget also led to concerns that the US, the world's largest economy, would lose its AAA debt rating.

The crisis has pushed markets into complicated territory.

This week, Germany - the biggest economy in Europe - saw its bond yield drop below the inflation rate for first time since reunification.

This suggests that investors are now so worried, they are willing to sacrifice a return on their investment to hold the least risky bonds in Europe.

And the Swiss franc and the Japanese yen have surged so much that both countries have intervened to slow the spikes in currencies.

Market movements

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Media captionBBC correspondents assess the reaction to the global market turmoil

Oil prices continued to fall, as fears of a global economic slowdown hit prices of commodities.

The prices of both US and Brent crude have fallen by more than 10% this week. Benchmark light sweet crude reached the lowest price since November last year.

In London, banking shares saw heavy falls, with Royal Bank of Scotland down 8%, and Lloyds Banking Group 3% lower, before recovering.

Earlier on Friday, Asian markets had slumped with Japan's main index down 3.7% and Hong Kong's 4.6% lower.

On Thursday in the US, the Dow Jones index had its worst day since December 2008, closing down 512.76 points, or 4.3%, at 11,383.68.

US shares have fallen for nine of the past 10 days - and lost 6.4% in the past week.

Wall Street's other leading indexes also slid, with the S&P 500 index falling 4.8% and the tech-heavy Nasdaq more than 5% lower.