Stocks worldwide plunged as concerns about Greece's debt crisis went global, with investors seeing it as an omen of turmoil in other European economies and governments struggling to calm markets.

Group of Seven finance ministers were due to discuss the Greek bailout in a conference call on Friday after Federal Reserve officials expressed concern and the White House said President Barack Obama was watching developments closely.

Euro zone leaders were to hold a special summit, and the German parliament was set to approve its share of the 110 billion euro bailout on Friday morning. Italy's cabinet gave initial approval, and the Dutch parliament was expected to vote for the package later in the day.

Chancellor Angela Merkel talked of a battle between governments and markets. EU monetary affairs chief Olli Rehn compared Greek insolvency to the financial crisis 18 months ago.

Little did authorities of the United States know in September 2008 what the bankruptcy of investment bank Lehman Brothers would lead to, Rehn wrote in a Finnish magazine.

The consequence was that the world's financial system was paralyzed in a way that led to the biggest global recession since the 1930s. Consequences from Greece's insolvency would be similar if not worse.

European shares plunged to a three-month low in early trade on Friday after Asian stocks sank. U.S. stocks fell as much as 9 percent in the last two hours of trading on Thursday, possibly partly due to a suspected trading glitch, before recovering slightly.

NO ALTERNATIVE TO EURO

German Finance Minister Wolfgang Schaeuble told parliament aid to Greece would uphold Germany's postwar legacy of serving peace in Europe, 65 years on from the country's darkest chapter in World War Two.

The joint European currency, the joint European economic area were right, he said. There is no comparable alternative to them in the 21st Century in the age of globalization. That is why we must defend the joint European currency.

The Greek parliament backed an austerity plan on Thursday, but selling accelerated across markets overnight after the European Central Bank said it had not considered buying government bonds to ease Greece's debt crisis. Some investors had hoped it would be more active in calming markets.

European investment-grade corporate credit default swaps hit their widest levels in over a year, while the premium that investors demand to buy peripheral euro zone government bonds, like Spain's or Portugal's, rather than benchmark Bunds rose.

European bank shares extended losses and the cost of insuring their debt reached levels not seen since the height of the crisis in 2009.

Sterling hit a one-year low against the dollar and tumbled against the euro after incomplete results of a UK general election suggested no party had emerged as a clear winner, raising the risk of a political stalemate that could hamper efforts to reduce the country's huge public debt.

The euro steadied after the United States said the Group of Seven ministers would discuss Greece in a phone call.

Japan's Finance Minister Naoto Kan said the G7 ministers were unlikely to discuss joint intervention in markets to support the euro.

To some degree this is a battle between the politicians and the markets, Merkel said. But I am firmly resolved -- and I think all of my colleagues are too -- to win this battle.

Investor concern over Greece triggered extraordinary volatility on Wall Street.

U.S. stocks closed down more than 3 percent on Thursday, but at one point all three major indexes rapidly plunged more than 9 percent. The Dow posted its biggest intraday point drop ever, falling almost 1,000 points.

In Athens, parliament approved the government's 30 billion euro ($40 billion) austerity bill on Thursday, imposing years of hard measures in return for the joint rescue by the European Union and the International Monetary Fund.

CREDIBILITY OR SLOW DEATH?

After violent protests in Athens, one Greek newspaper praised the parliament vote as the politics of credibility. But another called the plan a slow death contract.

ECB chief Jean-Claude Trichet dismissed the prospect of any euro zone debt default. Default is, for me, out of the question, he said.

European Council President Herman van Rompuy, who will chair the euro zone summit on the crisis, said the situation of Portugal or Spain had nothing to do with Greece.

What I now see are totally irrational movements on the markets set off by unsubstantiated rumors, he said.

(Additional reporting by Noah Barkin in Athens, Gernot Heller in Berlin, Tim Heritage in Brussels, George Matlock in London, Pedro Nicolaci da Costa in Richmond, Virginia; writing by Andrew Roche; Editing by Sonya Hepinstall)

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