* On track for worst week since August 2010 *
World stocks headed for their biggest weekly loss in almost a year on Friday as investors piled into safe havens on worries about sovereign debt crises on both sides of the Atlantic and after data showed meager growth in the U.S. economy.
The Swiss franc, a traditional safe-haven currency, rose to record highs against both the dollar and the euro, and gold prices soared to a record high above $1,630.
U.S. Republican leaders scrambled on Friday to rescue their budget deficit-cutting plan to stave off an unprecedented U.S. default just three and a half days before an Aug. 2 deadline. Fears the euro zone debt crisis was spreading also grew after Moody's threatened to downgrade Spain's credit rating.
Adding to investor gloom, the government reported the U.S. economy grew at a meager 1.3% annual rate in the second quarter as consumer spending barely rose. The government also said the economy came perilously close to flat-lining in the first quarter, in a sharp downward revision from its previous estimate.
Stock markets pared some losses after President Barack Obama said he was confident a solution could be reached on the debt ceiling talks.
"The U.S. debt talks will remain front and center going into the weekend, and the uncertain outcome will probably lead to more deleveraging today, especially after weak U.S. data and Moody's decision to put Spanish debt on negative watch," said Kathy Lien, director of currency research at GFT in New York.
Wall Street stocks fell more than 1% before sharply paring losses. The Dow Jones industrial average was down 24.52 points, or 0.20%, at 12,215.59. The Standard & Poor's 500 Index was up 0.45 points, or 0.03%, at 1,301.12. The Nasdaq Composite Index was up 7.55 points, or 0.27%, at 2,773.80.
World equities as measured by the MSCI world equity index fell 0.3%. The benchmark index has fallen nearly 3% this week, on track for its biggest weekly loss since August 2010.
European stocks were down 0.3%. Emerging stocks were down 0.8%.
Even if U.S. lawmakers agree on a last-minute deal, many investors believed it would not prevent ratings agencies from downgrading the United States' credit rating.
"We're basically standing on the edge of an abyss, peeking over, with the bottom nowhere to be seen. That's the situation facing all financial markets heading into a weekend that could prove to be one of the most crucial in history," said Ben Potter, strategist at IG Markets.
SAFE HAVENS IN FAVOR
The euro extended gains against the dollar, while the greenback trimmed losses versus the yen as U.S. stocks rallied late in the morning session.
Traders cited talk of possible amendments to the Republican version of a U.S. debt deal, which could lead to an eventual agreement.
The euro rose to session highs at $1.44074 on trading platform EBS. The dollar, meanwhile, edged higher from session lows and was last at 77.151 yen, down 0.8% on the day.
The dollar plunged to all-time lows against the Swiss franc of 0.7863. It also hit a four-month trough versus the yen of 77.01 on trading platform EBS, edging close to a record low of 76.25, and heightening worries that Japanese authorities may step in to stem currency strength.
Japanese Finance Minister Yoshihiko Noda warned about the strong yen, saying he would consider how long Japan could ignore current exchange rate moves without acting.
Rating agency Moody's placed Spain's Aa2 credit rating on review for possible downgrade. The move followed Thursday's disappointing Italian auction which saw 10-year bonds sold at the highest yield in 11 years.
"These sovereign debt problems are leading to a decent demand for safe-haven currencies like the yen and the Swiss franc," said Roberto Mialich, FX strategist at Unicredit.
Spot gold rose as high as $1,632.30, before easing back to around 1,624. U.S. crude oil fell $1.29 to $96.15 a barrel.
The weak U.S. economic data boosted demand for safe-haven U.S. debt and raised the prospect of further monetary accommodation. Ten-year Treasury notes were up 29/32, pushing yields to 2.85%, down from 2.95% late on Thursday. Benchmark 30-year bonds rose a point, their yields easing to 4.20%.
