World stocks fall for 8th day after wild week

Traders work on the floor of the New York Stock Exchange, August 5, 2011.

NEW YORK (Reuters) - World stocks fell for an eighth day on Friday, with around $2.5 trillion wiped off the value of global equities this week, but hopes the European Central Bank will buy the bonds of Italy's heavily indebted government helped lift markets off the lows of the day.

Better than expected U.S. monthly employment data also provided some Wall Street stocks with some support in a heavily traded session a day after indexes posted their worst losses in two years. The MSCI's All-Country World Index fell 1.3 percent on the day.

The Dow Jones industrial average eked out a small gain, rising 0.5 percent. Composite trading volume was the highest since the day after the U.S. "flash crash" in May 2010, when U.S. equity markets plummeted 9 percent in a single day.

World leaders moved to address the financial market volatility which has been driven by fears the global economy is slipping back into recession and by the inability of policymakers in Europe to extinguish the debt crisis engulfing the region.

Italy, under pressure to help halt the market rout that is endangering the global economy, pledged to speed up austerity measures and social reforms in return for European Central Bank help with funding.

"That was the real thing that got us started (off the lows)," said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York. That "may clear the way for the ECB to start buying some Italian bonds."

ALL EYES ON EUROPE

Apart from signs that the U.S. and global economies are weakening, despite record low interest rates and the pumping of liquidity into the system, the focus was clearly on Europe this week, where bond yields in Spain and Italy have been rising, threatening the same kind of refinancing problems that have already hit Greece, Ireland and Portugal.

The European Central Bank disappointed investors on Thursday by buying Irish and Portuguese bonds but not Italian or Spanish debt but by Friday appeared to be getting closer to action. Sources told Reuters the ECB is willing to support the Italian bond market if the government carries out reforms.

"The apparent quid-pro-quo between the ECB and Italy for the latter to bring forward austerity and structural reform in return for ECB Italian bond purchases, is the most desirable outcome for the markets available," said Alan Ruskin, global head of G10 currency strategy at Deutsche Bank in New York.

European stocks posted their biggest weekly decline in nearly three years and hit their lowest in a year. The FTSEurofirst 300 fell 1.8 percent to end at 975.02 on Friday.

China and Japan called for global cooperation. French President Nicolas Sarkozy was to discuss the financial markets with German Chancellor Angela Merkel and Spanish Prime Minister Jose Luis Rodriguez Zapatero.

Brazilian Finance Minister Guido Mantega said the world economy "is in a situation of stress" and South American nations must work together to create mechanisms to protect their economies from turmoil.

BETTER US NEWS

News of stronger-than-expected U.S. jobs growth in July relieved some of financial markets' worst fears, but that was not enough to spur sustained buying after an early bounce.

Rumours also circulated in jittery markets that a U.S. government downgrade from credit ratings agency Standard&Poor's could come as early as Friday night. The agency declined to comment on the rumour.

The Dow Jones industrial average gained 60.93 points, or 0.54 percent, to 11,444.61. The Standard & Poor's 500 Index dropped 0.69 point, or 0.06 percent, to 1,199.38. The Nasdaq Composite Index lost 23.98 points, or 0.94 percent, to 2,532.41.

By the end of the week S&P 500 had fallen 7.2 percent, its largest weekly percentage drop since November 2008.

U.S. Treasury debt prices fell after the jobs data, reversing some of the gains made in Thursday's panic of risk-averse trading. The 10-year Treasury note lost 1-13/32 to yield 2.56 percent.

The week was a tumultuous one for markets. The Swiss government cut interest rates on Wednesday after investors looking for a safe-haven bid its currency to a record high against the dollar, while Japan sold yen on Thursday to try and stem the rise in its currency.

The euro last traded up 1.3 percent at $1.4278 on trading platform EBS. The U.S. dollar fell broadly, reversing some of the prior day's sharp gains, as traders feared a downgrade to the United States' credit rating was imminent.

The Reuters-Jefferies CRB index, a global commodities benchmark, fell to a seven-month low as raw materials markets experienced one of their biggest sell-offs since the financial crisis.

(Editing by James Dalgleish, Jan Paschal and Dan Grebler)