By Richard Leong
(Reuters) - Fears over Europe's festering debt problems punished global stocks and the euro on Friday as the stakes intensified for the world's top finance officials to find ways to prevent the crisis from spiraling out of control.
The euro hit 6-1/2 month lows against the dollar, with more declines likely after the European Central Bank shifted away from further rises in interest rates, a key driver in the single currency's rally this year.
Nervousness over the outcome of a Greek debt swap deal fueled safe-haven buying of German and U.S. government debt. The 10-year Bund yield hit another record low, while yields on benchmark U.S. Treasuries touched a 60-year trough.
"Europe is the No. 1 thing causing pressure on the market as the realization grows that what we've done so far hasn't worked," said Liz Ann Sonders, the New York-based chief investment strategist at Charles Schwab Corp, which has $1.65 trillion in client assets.
Divisions within the ECB on the handling of Europe's debt woes boiled over on Friday. Reuters reported board member Juergen Stark will resign because of a conflict over its controversial bond-buying program. The ECB later confirmed Stark will step down at the end of the year.
"When you get a new story like this, that there's internal turmoil on the ECB, that immediately has implications for the bond-buying program, which immediately has implications on the capital level in European banks," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.
The debt swap deal is critical for Greece to secure a second bailout and avert a near-term default that could ripple across Europe and the global banking system.
Banks and insurers face a Friday deadline to indicate whether they will join an exchange of Greek debt, part of an international bailout package agreed in July. It is expected 70 percent of these private investors would agree to such a move, below the 90 percent threshold that Greece has said it wants to go through with the deal.
The cost to insure Greek sovereign debt for five years surged to a record high of 3,106 basis points, up nearly 300 basis points on the day, according to Markit.
With that as a backdrop, finance ministers and central bankers from the Group of Seven industrialized nations were to meet in Marseille later on Friday.
Meeting host France has called for a coordinated response from G7 members to deal with Europe's debt crisis and the region's shaky banks.
In the United States, President Barack Obama unveiled his $447 billion plan to revive economic growth. But investors worried that Congress would hold it up and the Federal Reserve may not follow quickly enough with its own action.
Fed Chairman Ben Bernanke, in a speech on Thursday, left the door open for more monetary stimulus but withheld details on the timing and what type of measures the Fed would enact.
At 12:40 p.m. (1622 GMT), the Dow Jones industrial average was down 324.11 points, or 2.87 percent, at 10,971.70. The Standard & Poor's 500 Index was down 33.01 points, or 2.78 percent, at 1,152.89. The Nasdaq Composite Index was down 63.51 points, or 2.51 percent, at 2,465.63.
Top European shares were off 2.6 percent, and the MSCI world equity index was off 2.9 percent. The FTSEurofirst 300 index and the MSCI world gauge were down 3.4 percent on the week.
Another retreat in equities boosted safe-haven German and U.S. government bond prices. The 10-year Bund yield touched an all-time low of 1.75 percent, while the benchmark 10-year U.S. yield was last 1.896 percent, the lowest in at least 60 years.
The euro was last down 1.6 percent against the dollar at $1.3663, its lowest in 6-1/2 months. The single currency has fallen 5.1 percent in September.
Gold slipped after soaring to a record high above $1,900 an ounce earlier this week due to its appeal as both a safe haven and a hedge against inflation. It was last down 0.2 percent at $1,865 an ounce as nervous investors sold the metal on growing concerns its run-up had been overdone.
(Reporting by Ryan Vlastelica and Rodrigo Campos in New York; Emelia Sithole-Matarise, Brian Gorman and Neal Armstrong in London; writing by Richard Leong; Editing by Dan Grebler)
