Mounting speculation that a leading credit agency is to imminently downgrade the ratings of a number of eurozone countries drove global markets sharply lower Friday and sent the euro currency spinning down to a 17-month low.
The euro nose-dived on speculation that Standard & Poor's was finally going to deliver the downgrades it had threatened for much of the 17-nation eurozone just over a month ago over concerns of Europe's ability to get a grip on a debt crisis that's raged for around two years.
In the run-up to the last meeting of EU leaders on Dec. 9, S&P said it was putting 15 of the eurozone's nations on notice for a downgrade and there has been particular concern that France's rating would be cut.
A downgrade of the eurozone's triple A nations, such as France, could have far-reaching implications, potentially complicating the ability of Europe's bailout fund, the European Financial Stability Facility, or EFSF, to provide support to struggling countries. France is a major contributor to the EFSF.
Rumors of the downgrades provide further evidence that investors in the markets remain jittery despite some positive signs over Europe's debt crisis this week. Auctions from the likes of Italy and Spain have gone smoothly while the European Central Bank's chief noted signs of economic stabilization.
"This rally is not built on solid foundations so this (selling) is indicative that underlying there's not much confidence," said Louise Cooper, markets analyst at BGC Partners.
Standard & Poor's did not comment on the speculation.
Nevertheless, the market response to the speculation was fairly savage across all markets.
In Europe, Germany's DAX closed down 0.6 percent at 6,143.08 while the CAC-40 in France fell 0.1 percent to 3,196.49. The FTSE 100 index of leading British shares ended 0.5 percent lower at 5,636.64.
Meanwhile, the euro was 1.1 percent lower at $1.2672, having earlier fallen to a low of $1.2623, its lowest level since August 2010.
In the U.S., the Dow Jones industrial average was 0.7 percent lower at 12,381 while the broader Standard & Poor's 500 index fell 0.7 percent to 1,286.
Adding to unease was a dive in profit at J.P. Morgan Chase & Co of 23 percent in the last quarter of 2011.
Though the pickup in the stream of U.S. earnings will impact markets over the coming days and weeks, Europe's debt crisis is likely to remain the main focus.
Europe's crisis sprang from worries that countries had taken on more debt during boom years than they could pay back once their economies slowed.
Those concerns led investors to demand astronomically high yields or interest rates to lend money to countries like Greece, Ireland and Portugal, eventually forcing those three to seek bailout loans, rather than rely on market financing.
In recent months, it has seemed as if Italy would join that ignominious club, but that would present an insurmountable challenge: Italy's economy dwarfs the three that have sought rescues and Europe can't afford to bail it out.
Earlier, Asian shares were mostly higher, responding to Thursday's strong debt auctions in Spain and Italy. Japan's Nikkei 225 index rose 1.4 percent to close at 8,500.02 and South Korea's Kospi index moved 0.6 percent at 1,875.68. Hong Kong's Hang Seng index vacillated before closing in positive territory, up 0.6 percent to 19,204.42.
But mainland Chinese shares fell as investors continued to cash in on recent gains. The benchmark Shanghai Composite Index lost 1.3 percent to 2,244.58, while the Shenzhen Composite Index dropped 3.5 percent to 845.93.
Even oil prices, which have been rising on fears of a strike in Nigeria and an embargo of Iranian oil, fell Friday afternoon. When investors worry about the economy, energy prices typically fall since slow growth hurts demand.
Benchmark oil for February delivery was down 30 cents to $98.80 per barrel in electronic trading on the New York Mercantile Exchange.
Pamela Sampson in Bangkok contributed to this report.