World stock markets dropped on Friday after U.S. regulators charged Goldman Sachs Group Inc. with fraud related to subprime mortgages, while the euro dropped on worries about Greece's debt crisis.

The CBOE Volatility index <.VIX> jumped 15.54 percent as U.S. stocks ended the session down more than 1 percent in the

heaviest volume of the year. The VIX, which is Wall Street's favorite gauge of investor fear, surged just as the Goldman news headlines came out, according to Reuters charts.

Investors moved money into safe-haven U.S. government debt, pushing prices higher and yields lower.

World equities moved in sympathy with U.S. stocks, which were under severe selling pressure as financial issues plunged on the charges against Goldman Sachs and some disappointing earnings. The decline was the market's biggest in nearly two months, taking the shine off a six-day winning streak.

Goldman fell nearly 13 percent in its worst one-day drop since January 2009, to $160.70 on huge volume after the Securities and Exchange Commission sued it for fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression.

It's going to take a while for the markets to digest this as investors weed out what it could mean for Goldman and if other banks could be hit with something similar, said Tom Lydon, president of Global Investment Trends in Newport Beach, California.

Defaults on subprime mortgages and the unraveling of related derivatives and debt played a major role in the credit crunch that led to a meltdown on Wall Street and the worst U.S. recession since the 1930s.

At the close, the Dow Jones industrial average <.DJI> was down 125.91 points, or 1.13 percent, at 11,018.66, while the Standard & Poor's 500 Index <.SPX> was off 19.54 points, or 1.61 percent, at 1,192.13. The Nasdaq Composite Index <.IXIC> lost 34.43 points, or 1.37 percent, at 2,481.26.

The MSCI's global equity index <.MIWD00000PUS> settled down 1.57 percent, though still set for its seventh straight weekly gain. The pan-European FTSEurofirst 300 <.FTEU3> also was down 1.52 percent.

Overall, global shares edged off 16-month highs as persistent uncertainty over Greece's ability to pay its debts tempered optimism over the global economic recovery.

In currencies, the dollar was up against a basket of major trading-partner currencies, with the U.S. Dollar Index <.DXY> up 0.37 percent at 80.778 from a previous session close of 80.482.

The euro remained pressured and Greek bond yields rose after Athens said it was preparing to activate an IMF/EU financial aid package.

The euro was down 0.54 percent at $1.3506 from a previous close of $1.3579.

Against the Japanese yen, the dollar was down 0.95 percent at 92.11 from a previous session close of 92.990.

GREECE MOVES

The euro slid for the second day due to renewed worries over Greece's ability to service its sovereign debt. On Thursday, the euro snapped a five-day winning streak as investors' concerns escalated about Greece's debt problems.

Greece lurched closer toward asking for international aid after it requested official talks with European authorities and the International Monetary Fund.

European Central Bank President Jean-Claude Trichet told euro zone finance ministers that the situation for Greek banks remains difficult and could deteriorate further.

The cost of insuring Greek sovereign debt rose about 10 basis points from Thursday's close to 428.5 bps, according to CMA DataVision. Greek 10-year bond yields rose to 7.4 percent, widening the 10-year Greek/German government bond yield spread.

U.S. Treasury debt, investors' favorite safe haven, rose.

The benchmark 10-year U.S. Treasury note was up 17/32, with the yield at 3.77 percent, while the 2-year U.S. Treasury note was up 3/32, with the yield at 0.96 percent. The 30-year U.S. Treasury bond was up 22/32, with the yield at 4.67 percent.

In energy and commodities trading, U.S. light sweet crude oil fell $2.40, or 2.81 percent, to $83.11 per barrel, and spot gold fell $21.35, or 1.84 percent, to $1136.60. The Reuters/Jefferies CRB Index <.CRB> was down 3.46 points, or 1.24 percent, at 276.29.

(Additional reporting by Rodrigo Campos in New York and Sebastian Tong in London; Editing by Dan Grebler)

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