World stocks extended sharp falls on Friday while government bonds rose as a global rout triggered by fears of contagion from the euro zone debt crisis prompted investors to dump risky assets.

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.

U.S. stocks fell as much as 9 percent in the last two hours of trading on Thursday before recovering slightly and the Dow suffered its biggest ever intraday point drop as a suspected trading glitch and euro debt fears threw markets into disarray.

Concerns Greece's debt woes would spread into other parts of Europe are fanning risk aversion, with a lack of new anti-crisis measures from the European Central Bank on Thursday triggering a new wave of flight to safety. World stocks have erased all of this year's gains to stand down 4 percent on the year.

It is clear that the euro zone is in a very difficult situation and there is no quick fix, said Tammo Greetfeld, equity strategist at UniCredit.

It looks like foreign investors, particularly U.S. investors, yesterday for the first time significantly acknowledged that there are some risks emanating from the euro zone that could be severe.

The MSCI world equity index <.MIWD00000PUS> fell 1.3 percent, having hit its lowest level since February. The index is on track to post its biggest weekly loss since November 2008.

The FTSEurofirst 300 index <.FTEU3> fell 2.7 percent, also hitting levels not seen since early February.

Fund tracker EPFR Global said Europe equity funds saw more than $2 billion in net outflows in the week to May 5, the most in a year.

Emerging stocks <.MSCIEF> fell 2.1 percent.

The pound fell as low as $1.4596, its weakest since late April 2009, as vote tallies so far showed the opposition Conservatives were on course to become the largest party in parliament but lacked a clear majority.

Many believe political uncertainty could derail any quick plans to put UK public finances in order and could prompt credit agencies to downgrade Britain from its AAA status.

U.S. crude oil briefly fell below $77 a barrel, losing $10 in the past week as concerns grew that the growing debt crisis would hit global economic growth.

Bund futures rose 22 ticks while Japanese government futures hit a 2-month high of 140.10.

EURO WOES

The euro nursed hefty losses after hitting 14-month lows of $1.2510 on Thursday. It also rose 2.3 percent at 116.97 yen after shedding 5 percent to its lowest level since December 2001 in the previous day.

Investors are eyeing a key German vote on the Greek aid package. Germany's Bundestag, the lower house of parliament, is due to vote on a draft law on the German contribution to the aid package at around 0900 GMT.

Greece took a step closer to receiving rescue funds after its parliament approved a 30 billion euro austerity bill late on Thursday and the French Senate approved France's contribution to the European Union aid package.

The euro bounced off lows after a U.S. Treasury spokesman said on Thursday Group of Seven finance ministers will discuss efforts to get aid to Greece [ID:nN06238681].

The market is at loss as to where to find a conclusion to this Greece debt problem and there is fear that problems will spread to other countries, said a proprietary trader at a Japanese trust bank in Tokyo.

The dollar <.DXY> fell 0.2 percent against a basket of major currencies.

(Editing by John Stonestreet)

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