Market turmoil persists despite US jobs data
Instability on the stock markets has continued, despite better-than-expected US jobs figures.
Investors' confidence took another hit owing to growing concerns about the eurozone debt crisis and the weak economic recovery in the US and Europe.
European markets closed sharply lower for the second day but US shares recovered to close slightly higher.
Meanwhile, a report suggests credit rating agency Standard & Poor's will downgrade US government debt.
US network ABC reported that Washington expected S&P to cut its AAA rating following the protracted and acrimonious process of raising the country's debt ceiling.
Any downgrade would further erode global investors' confidence in the US economy. S&P has declined to comment on the report.
Earlier, a decline in the US jobless rate caused the US markets to open higher and gave temporary relief to European indexes.
But London's FTSE and Frankfurt's Dax both closed down about 2.7%.
US stocks recovered from a late-morning slump to end the day slightly higher.
At a specially-convened press conference after European markets closed, Italian Prime Minister Silvio Berlusconi said that G7 finance ministers would meet within days to discuss measures to combat the eurozone debt crisis, which is the main cause of the growing turmoil in global financial markets.
He also said that Italy would speed up measures to balance its budget by 2013, a year earlier than planned, and work to amend the Italian constitution to make balanced budgets a requirement for future governments.
He also announced some labour market reforms.
European markets had been down as much as 4% in the morning, before recovering, and then lurching back down again by the end of the session.
"Failed rallies are not a good sign," said markets analyst Louise Cooper, from BGC Partners.
"Investors are just really, really nervous, thinking what can be done to get us out of this hole, and there are not many answers," she told BBC radio.
The FTSE 100 closed down 2.7%, with banking shares such as Lloyds, RBS and Barclays suffering falls as large as 7%. The London market has now lost 10% in the past week.
In Germany the Dax closed down 2.8%, while the French Cac 40 ended just over 1% down.
US stocks ended the session up 0.5% as investors recovered their poise following heavy falls in late morning trading.
Investors are also worried about the state of the US economy after recent data on economic growth and consumer spending raised questions about the strength of the recovery.
Some analysts have even suggested the US could be heading for another recession.
Earlier, the EU's Economic and Monetary Affairs Commissioner, Olli Rehn, said he thought the movements were "incomprehensible" and "not justified by the economic fundamentals", particularly in Italy and Spain, the latest focus of investors' concerns.
Analysts suggested the instability would continue as the main reasons for the concerns had not gone away.
"The markets are looking for a resolution on the eurozone debt crisis and that resolution is not easily at hand," said Jan Lambrets, head of financial markets at Rabobank, who forecast "a very grim road" in the months to come.
Investors are worried as European authorities have so far been unable to control the crisis and are unhappy that changes to a key rescue fund agreed last month have not yet been enacted.
"Until markets have seen some resolution, we're not going to see any return of confidence," Nomura economist Peter Westaway told BBC News.
"There was a lot of mutual backslapping after the eurozone summit a couple of weeks ago, but they haven't delivered," he said.
Mr Rehn stressed that measures to improve the scope and effectiveness of the 440bn-euros rescue fund, the European Financial Stability Facility (EFSF), agreed on 21 July, should be in place by September.
"The political will to defend the euro should not be underestimated," Mr Rehn added.
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.
Many analysts argue these changes need to be implemented quickly in order to calm stock markets.
Mr Barroso 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.
His comments triggered sharp falls in markets across Europe because of 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.
That sentiment ripped across the world, hitting markets in Asia and the US, where the Dow Jones index had its worst day since December 2008, closing 4% down.
This latest crisis of confidence has come at a time when many of Europe's leaders are on holiday.
German Chancellor Angela Merkel held a telephone conference with French President Nicolas Sarkozy and Spanish Prime Minister Jose Luis Rodriguez Zapatero to discuss the latest problems in the eurozone.
UK Prime Minister David Cameron, who is on holiday in Italy, discussed the financial situation with Chancellor Merkel and the governor of the Bank of England, Mervyn King, on the telephone.
There were rumours earlier that the European Central Bank (ECB) was preparing to buy Spanish and Italian bonds to try to help those countries, which briefly helped their stock markets.
The ECB was said to have bought up bonds issued by the Irish and Portuguese governments on Thursday.
But traders were disappointed that the bank did not appear to have intervened to help Spain and Italy, whose borrowing costs have risen significantly recently.
Reports suggest the Italian government is under pressure from the ECB to implement reforms, hence Mr Berlusconi's hastily-arranged press conference.
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.