Europe's handling of its debt crisis returned to haunt markets Friday, with stocks down sharply and the euro sinking to its lowest level against the dollar in over six months after a top European Central Bank official unexpectedly resigned.
Juergen Stark, a key member of the ECB's rate-setting governing council, quit for personal reasons, the ECB said. Investors, however, noted that Stark has been a consistent critic of the ECB's program to purchase government bonds of debt-ridden European nations in the markets.
The program is designed to prevent the European debt crisis from enveloping Italy and Spain in particular, but it potentially exposes the ECB to the risk of huge losses on shaky bonds.
Stark will stay in place until a replacement is found.
Disagreement over how to handle the European debt crisis, which has already led to multibillion-euro bailouts for three of the euro's 17 members, has been cited as one of the main reasons why it continues to flare up.
"The European troubles are permeating across global financial markets," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank.
The euro, which was already trading lower after Thursday's indication from ECB president Jean-Claude Trichet that there won't be any more rate hikes in coming months, fell to its lowest level since the end of February after news of Stark's resignation.
By mid-afternoon London time, the euro was 1.2 percent lower at $1.3723. That's a tad higher that the $1.3697 level it hit earlier, its lowest rate since Feb. 22.
Stocks also took a hit. In Europe, the FTSE 100 index of leading British shares was down 2.1 percent at 5,227 while Germany's DAX fell 3.5 percent to 5,218. The CAC-40 in France was 3.2 percent lower at 2,987.
In the U.S., the Dow Jones industrial average was down 1.7 percent at 11,105 while the broader Standard & Poor's 500 index fell 1.4 percent to 1,164.
Stocks had already been trading lower after Federal Reserve chairman Ben Bernanke failed to outline new monetary stimulus ahead of a meeting of finance ministers and central bankers of the Group of Seven top industrialized countries.
Though G-7 nations are indicating they want to pursue measures to lift growth, the markets remain skeptical as to what they can actually do, given the budgetary constraints that are afflicting many countries, particularly in the U.S. and Europe.
"In the U.S. and the eurozone, the escalation in debt and deficits leaves little room for any substantive fiscal stimulus, thus putting the burden on monetary policy," said Neil MacKinnon, global macro strategist at VTB Capital.
U.S. Treasury Secretary Timothy Geithner backed President Barack Obama's $450 billion jobs package, which was outlined to Congress Thursday, and said Europe's policymakers have to take more forceful action in dealing with the debt crisis. He also called on China and other emerging countries to bolster demand.
"The world economy is in the midst of the second slowdown of this recovery from the financial crisis of 2008 and 2009," Geithner wrote Friday in the Financial Times. "The question is not whether we have the economic or financial capacity to act to strengthen growth, but whether we have the political ability to do the right things."
Earlier in the day, Asian shares struggled for gains. Japan's Nikkei 225 index swung between gains and losses before closing down 0.6 percent at 8,737.66. Sentiment was hardly helped by news that the country's economy contracted in the April-June quarter at an annual rate of 2.1 percent, worse than the initial estimate of 1.3 percent.
Hong Kong's Hang Seng was 0.2 percent lower at 19,866.63, while mainland Chinese shares lost ground after the government reported that prices rose 6.2 percent from a year earlier. While that represented an easing from a 37-month high of 6.5 percent in July, it was far above the government's 4 percent target for the year.
China's National Statistics Bureau also said industrial production slowed in August, rising 13.5 percent from the year before, compared with a 14 percent increase in July.
The benchmark Shanghai Composite Index edged down less than 0.1 percent to 2,497.75 after gaining 1 percent earlier in the day while the Shenzhen Composite Index lost 0.6 percent to 1,094.03.
The reverse in stocks weighed on oil prices too. Benchmark oil for October delivery was down $2.32 to $86.73 in electronic trading on the New York Mercantile Exchange.
Pamela Sampson in Bangkok contributed to this report.