Markets recover after European agreement

European finance ministers on Friday agreed to harden budget rules in a bid to rein in a galloping debt crisis as global stock markets and the euro recovered slightly after a disastrous week.

Following specially convened talks in Brussels, EU president Herman Van Rompuy said there was "a very clear broad consensus on the principle of having financial and non-financial sanctions" on heavily indebted eurozone states.

But a proposal by Germany to force weaker euro area countries into bankruptcy if necessary appeared to fall flat, with Van Rompuy telling reporters that the idea was "only in a long-term context."

Financial markets have been racked for days by worries over the possibility that some eurozone economies will no longer be in a position to repay debts and even that the eurozone itself could come apart because of the crisis.

"Panic seems to be taking over" on the markets, said Manoj Ladwa, a trader at London-based financial spread betting company ETX Capital.

At City Index, another spread better, market strategist Joshua Raymond said that "the markets are a whole mess of uncertainty and fear right now."

European stocks recovered at the close of trading on Friday despite sharp falls earlier in the trading day, with London's FTSE 100 index ending down 0.20 percent and the Paris CAC 40 dipping by 0.05 percent.

Euro rose

The euro also rose to 1.2567 dollars in late trading in London compared to 1.2482 dollars in New York late on Thursday and gained against the Japanese currency, rising to 113.38 yen from 111.88 yen previously.

But the general picture was still one of decline for European equities due to deep investor uncertainty, with the Paris CAC 40 losing 3.64 percent over the week and the Frankfurt Dax down 3.75 percent compared to last Friday.

"There are two key issues that investors have become increasingly sensitive about -- how wider EU sovereign debt could impact economic growth for several years, and the potential for stricter financial regulation," Raymond said.

"It is these issues that have taken even more of a knock in confidence this week and have had investors running for the hills," he added.

David Morrison, a currency trader at GFT, said: "There's a deep-seated fear of how the European sovereign debt issue is affecting wider markets."

Speaking on a visit to Brussels, Chinese Commerce Minister Chen Deming said Beijing was "following carefully" the development of Europe's debt crisis.

Several European states have racked up huge debts and deficits as a result of the global economic crisis and the current turmoil kicked in as more and more investors lost confidence in governments' ability to repay these debts.

German parliament approves bailout

Also on Friday the German parliament gave its approval to Berlin's 150-billion-euro (189-billion-dollar) share of a near trillion-dollar eurozone rescue package put together earlier this month in a bid to prop up the euro.

That money comes on top of a 110-billion-euro bailout for Greece, which hit a wall earlier this month when growing investor doubts effectively barred it from debt markets and forced it into the hands of the IMF and the EU.

Europe has come under heavy criticism for its handling of the debt crisis, with many analysts pointing to indecision and discord in Europe's biggest economies and at the very heart of European policymaking.

"The main reason why the euro has been targeted is connected to European discord," read a comment in Tagesspiegel, a newspaper in Berlin.

"The recognition that discord and negligent budgeting have weakened the euro ought to lead to an immediate change of tack."

The crisis has also showed signs of undermining economic recovery.

Business activity across the 16 eurozone countries slowed in May, sending a "worrying" signal that the debt crisis could be crimping activity, research group Markit said in its closely watched purchasing managers' index.

At IHS Global Insight, an economic research company, analyst Howard Archer warned that this could be a "hint that the eurozone debt crisis could be starting to have some dampening impact on economic activity."