European stocks are primed for a pummeling on Friday, following ravaged U.S. and Asian shares, as Europe's debt crisis sent waves of dread through global markets and battered sterling and the euro.

U.S. stocks plunged 9 percent in the last two hours of trading on Thursday before clawing back some of the losses as a suspected trading glitch and fears of a new credit crunch in Europe threw markets into disarray.

Sterling was especially hard hit, falling to a one-year low against the dollar, as well as shedding gains against the euro as UK elections seemed likely to result in no clear winner [ID:nLDE64600H]. It shed 12 yen against the safe-haven Japanese currency at one point.

However, unlike the worst days of the 2008 credit crisis, when money poured out of riskier assets like equity funds and into money market funds, investors are not retreating completely.

Participants are unclear on where the market is going, said Scott Bennett, head of Asian credit at Aberdeen Asset Management in Singapore. Views diverge, but they are all clear that they don't want to be here now and so the market is selling off.

By 0632 GMT, futures for STOXX Europe 50, Germany's DAX and France's CAC 40 were down 2.1 to 2.7 percent. Spreadbetters expected Britain's FTSE 100 <.FTSE> to open as much as 130 points or 2.5 percent lower.

Investors in Asia, however, appear to have realized they may have overreacted to the U.S. carnage.

Japan's Nikkei <.N225> skidded nearly 4 percent to a two-month low in its worse day in slightly over a year, but it pared losses on short-covering.

Asian shares, which fell 2.4 percent, the biggest daily drop in three months, also reclaimed some losses by mid-afternoon. The MSCI index of Asian shares outside Japan was down 1.9 percent <.MIAPJ0000PUS>.

Greece's 110 billion ($140 billion) bailout has been a plumb-line for markets since the start of the week. The MSCI world share index <.MIWD00000US> has fallen 7 percent since Monday, while the MSCI index for Asian shares excluding Japan was down 8.25 percent.

Investors are unconvinced Greece can achieve the austerity measures it has pledged in return for a rescue and fear that problems faced by other debt-ridden euro zone economies may jeopardizing the economic health of the whole bloc.

Europe equity funds saw more than $2 billion in net outflows in the week to May 5, the most in a year, as fears grew of a euro zone sovereign debt crisis, EPFR Global said on Friday.

Money market funds had net outflows of $18 billion in the week, indicating some investors were still putting cash to work in fresh positions elsewhere, the fund tracker said.

The euro, which fell to 14-month lows of $1.2510 on Thursday, steadied in Asia just under $1.27 after the United States said G7 finance ministers would discuss Greece's bailout in a telephone call.

Euro zone leaders also meet later in the day in a special summit, while Germany's parliament is to vote on the Greek bailout plan.

The United States is due to report U.S. non-farm payrolls and unemployment data for April, and while the numbers are expected to be strong, pointing to an economic recovery, analysts said any market reaction is likely to be muted by the debt debacle.

Traders are anticipating a better open to U.S. equities after the strong rebound in the Australian dollar and the Japanese yen and potentially strong data, said Robert Rennie of Australia's Westpac Bank.

If, and it is a very big if, the carnage in U.S. equity was down to human error rather than Greek developments, we could actually see a positive reaction to a good payroll outcome.

The debt crisis is threatening to raise funding costs for European governments and some companies as investors demand bigger premiums for the higher risks or shun such bonds.

Interbank rates, which banks charge each other for short-term loans, rose on Thursday on fears that the euro debt crisis will worsen and credit markets could seize up as they did in the credit crunch in 2008, which helped throw economy into recession.

This brief rerun of the darkest days of 12-24 months ago is a real confidence killer for leveraged investors, not to mention the rest of us, said Rory Robertson, an interest rate strategist at Macquarie in Sydney.

The real worry is that the growing risk aversion via growing problems in Europe is driving up funding costs across the global financial system.

The dash for safety pushed gold to near record highs and 10-year U.S. Treasury yields to five-month lows.

The dollar index <.DXY> held near one-year highs at 84.9, as the U.S. currency gained elsewhere from the super safe-haven status of Treasuries.

(Editing by Jan Dahinten)

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