Spain’s main share index fell more than 2% before recovering, while shares in London fell by as much as 1 per cent reports the BBC.
Those losses followed steep falls for Asian markets. Tokyo’s Nikkei average fell 3%, the biggest one day fall since last August.
Asian markets were also hit by losses in New York, where the Dow Jones closed more than 1% lower.
Investors were discouraged by two weak reports on the US economy.
“There is no resolution to the [European] problem yet, and we also we had very disappointing US data, so overall, it’s negative and further denting market sentiment,” said Frances Cheung, a senior strategist, at Credit Agricole CIB in Hong Kong.
Confidence in European banks was undermined by the ratings agency Moody’s which cut the credit ratings of 16 Spanish banks late on Thursday.
It also cut the debt rating on Santander UK, a subsidiary of the Spanish banking giant.
Santander shares were down 1% in early trading on Friday.
Bankia shares were up 2% following Thursday’s 14% slump.
In Asia, banking shares were hurt after the chief executive of ANZ said volatile market conditions meant that Australian banks were not lending to each other.
The wholesale lending markets are an important source of funds for banks.
“Right now, markets are closed again, and this is what happens in this sort of situation,” said ANZ chief executive Mike Smith.