Rising worries over Italy's and Spain's debt woes sank European markets, but stocks in the United States held up in extremely volatile trade helped by a surprise improvement in jobs data.
Stock markets went on a worldwide roller-coaster ride on Friday as traders digested the US jobs report, news about Europe's debt crisis and a rumour that the Standard & Poor's ratings agency would downgrade the United States's debt rating on Friday afternoon.
Ultimately, the downgrade did not materialise, and the Dow rose 0.54 per cent to close at 11,444.61 - a slight rebound, but not enough to avoid steep losses for the week.
The broader S&P 500 was down 0.06 per cent for the day, while the tech-heavy Nasdaq Composite fell 0.94 per cent.
"While investors digested the payroll report and remained homed in on developments from the ongoing eurozone debt crisis, markets swung wildly from positive to negative, before finally landing much where they started," the Charles Schwab brokerage said in a research note.
Just before US markets opened, the US Labour Department reported that the country's economy generated 117,000 jobs in July, cutting the official unemployment rate down a notch to 9.1 per cent.
Economists had forecast only a net 84,000 jobs generated.
The mildly positive surprise on jobs came despite a drumbeat of bad economic news over the past week, which had led some analysts to worry that the United States was on the brink of a new economic downturn.
"The job number was good but not good enough to get us out of all this other stuff," said Marc Pado, chief US market strategist for Cantor Fitzgerald.
US financial stocks were hammered amid fears of contagion from Europe's debt crisis, with Bank of America plunging 7.5 per cent and Citigroup falling 3.9 per cent.
In Europe, stocks closed lower despite rumours that the European Central Bank was buying Spanish and Italian government bonds.
Yields on the two country's bondshave surged in recent days as investors fret about the solvency of the two countries.
An Italian minister confirmed that the ECB had guaranteed it would buy his country's bonds starting on Monday, but only after Europe's markets had closed for the day, with painful losses.
London's FTSE-100 was down 2.71 per cent, while in Frankfurt, the DAX dropped 2.78 per cent.
In Paris, the CAC-40 slid 1.26 per cent to chalk up a record 10th consecutive daily loss.
Madrid lost 0.18 per cent, while Milan fell 0.70 per cent.
"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," he added.
Asian stock markets also closed sharply lower: Tokyo by 3.72 per cent, Sydney 4.0 per cent, and Taipei 5.58 per cent.
Traditional safe havens like gold and US Treasuries did not provide any place for investors to hide amid the global turmoil.
Gold prices tumbled on the New York spot market, trading for $1,639.65 per ounce at 2000 GMT, down from $1,650.72 at the same time on Thursday.
The precious metal hit record highs of above $1,680 earlier this week.
Prices for US government bonds, which rallied in recent days, came back down on Friday.
The yield on the 10-year Treasury rose to 2.56 per cent from 2.46 per cent late Thursday, while that on the 30-year bond climbed to 3.82 per cent from 3.72 per cent. (Bond prices and yields move in opposite directions.)
Many analysts have said that fears of a double-dip recession in the United States triggered the sell-off in markets this week, which was notably sharp on Thursday, when the Dow had its worst one-day drop since 2008.
"We now place US recession odds at 40 per cent," said Nigel Gault, chief US economist for IHS Global Insight.
In the forex market, the dollar slid against the euro, trading for $1.4281 against the euro at 2100 GMT, compared to $1.4104 late on Thursday.
The dollar also dropped against the yen, buying 78.54 yen against 78.93 late on Thursday.
It gained against the Swiss franc, rising to 0.7673 francs from 0.7666 a day earlier, following efforts by Switzerland's central bank to contain the rise of its currency.
The greenback weakened to $1.6393 against the British pound from $1.6266 late on Thursday.