Global stocks plunged on Friday on the increasing prospect of a sharp economic downturn, with attention focused on US jobs data, widely expected to deepen the gloom of flagging growth and eurozone debt.

European stock markets initially dived 3.0-4.0 percent after heavy falls in Asia and on Wall Street as traders nervously awaited vital US employment figures for July due at 1230 GMT and wondered whether a so-called double-dip recession was in sight.

However losses were less acute by midday, while Milan and Madrid managed to eke out modest gains on rumours that the European Central Bank was preparing to buy hard-hit Spanish and Italian bonds.

London's benchmark FTSE 100 index was down 2.62 percent after initial losses of more than 3.0 percent, which had sent it to levels last seen 11 months ago.

Frankfurt slid 2.35 percent and Paris lost 1.16 percent. Milan and Madrid rose 0.45 and 0.40 percent respectively.

In foreign exchange deals, the dollar fell to 78.46 yen from 78.93 yen in New York late Thursday, a day after Japan intervened in markets to stem the yen's rise. The euro rose to $1.4149 from $1.4106.

"The reality of a global economic contraction seems to have finally kicked in as the markets continue to plummet," said Manoj Ladwa, senior trader at ETX Capital in London.

"Investors are pricing in a slowdown in growth and sovereign debt problems as equities drop across the board. While US payroll and employment numbers later today are likely to come in weak, the market does seem to have factored this in, and could recover some of its losses later in the session," he added.

Asian stock markets closed sharply lower on Friday as already-fragile investor confidence was hammered by more weak US economic data and a warning from the head of the European Commission that the eurozone debt crisis had spread from peripheral countries to mainstay economies such as Italy.

"It's going to be a very ugly end to an even uglier week," IG Markets analyst Ben Potter said in Sydney.

Tokyo tumbled 3.72 percent, Sydney slumped 4.0 percent and Taipei dived 5.58 percent. Fear swept across Asia from the United States, where the Dow Jones Industrial Average suffered its worst one-day drop since December 2008 to close 4.3 percent lower, erasing all this year's gains.

"We're seeing the erosion and now the loss of confidence, confidence in the economy, confidence in the market, confidence in the policy makers. It's all showing up," said US-based Hugh Johnson, of Hugh Johnson Advisors.

The latest front cover of the Economist publication meanwhile carried the headline: 'Time for a double dip?' -- with the respected magazine questioning whether the US will fall back into recession.

A double-dip recession refers to a short-lived recovery from one recession and then a new plunge back into economic contraction.

"While we are not looking for a global recession, which is a surprisingly rare event, there is a lot of confusion out there," said Kathleen Brooks, an analyst at traders.

"The markets staged impressive rallies over the last two years on the basis that global growth would bounce back. However, the recovery has been shallower than expected and now the markets have to re-adjust.

"We may be entering a period where the markets become much more realistic about the growth outlook as Asia tries to move towards a consumption growth model and most of the West tries to strengthen sovereign balance sheets.

"While the US is centre stage today, we can't forget the eurozone," she added in a research note to clients.

European Commission chief Jose Manuel Barroso urged eurozone leaders on Thursday to re-think their currency's defences, admitting debt contagion has now spread to the heart of the single currency area and urging a rapid revamp of new rescue systems.

A deal on July 21 on a second bailout for Greece worth about 160 billion euros ($226 billion) has failed to prevent sharply higher debt-risk premiums for Italy and Spain, the eurozone's third and fourth-largest economies.

His comments came as the European Central Bank announced it would resume emergency credit-easing measures, some of which were last enacted at the height of the financial crisis.

But the ECB's efforts still failed to restore confidence. The debt risk premium for Spain and Italy hit a record euro-era high Friday on growing concerns the two countries could be dragged down by the eurozone debt crisis but the pressure then eased slightly on rumours of ECB bond buying.

The eurozone debt crisis has put Italy and Spain under huge pressure in recent weeks after Greece, Ireland and Portugal had to be bailed out by the European Union and the International Monetary Fund.