08/05/2011 12:28 EDT | Updated 10/04/2011 05:12 EDT

Positive US jobs report fails to erase fears over US, European economies

BRUSSELS - Stocks resumed their downward slide Friday as better than expected U.S. jobs figures failed to erase fears over weak growth in the world's biggest economy and Europe's debt crisis.

The monthly U.S. jobs data triggered a short-lived rally in European and U.S. markets before major stock indexes started dropping again, adding to some of the worst losses since the collapse of U.S. investment bank Lehman Brothers in 2008.

The U.S. government reported that some 117,000 jobs were created in July and that the unemployment rate inched down to 9.1 per cent from 9.2 per cent in June.

But while better than most analyst expectations, the rate of job growth was still far too low for a healthy economy and could not alleviate concern that the U.S. may fall back into recession.

"The payrolls delivered a shot of adrenalin to the markets, but that's all it was, a short-term respite while the sell-off continues," said David Jones, chief market strategist at IG Index.

In the U.S., the Dow Jones industrial average dropped 0.9 per cent to 11,287, while the broader Standard & Poor's 500 index fell 1.2 per cent to 1,185.

In Europe, France's CAC-40 closed down 1.3 per cent at 3,278.56 while Germany's DAX slid 2.8 per cent to 6,236.16. The FTSE 100 index of leading British shares ended 2.7 per cent lower at 5,246.99.

Investors were shaken by rumours that the U.S. credit rating may soon be downgraded. And amid reports that Italy is poised to announce another package of economic reforms, investors in Europe remained reluctant to be too exposed into the weekend.

The stock markets in Italy and Spain — the two countries that had become the focus of investors' debt fears in recent weeks — outperformed their peers in Europe despite falling. Spain's IBEX ended 0.2 per cent lower at 8,671.20 while Italy's FTSE MIB fell 0.6 per cent to 16,028.80.

The bond market pressure on the two countries eased compared with earlier this week, but the yields, or interest rate, on Italian 10-year bonds surpassed that paid on their Spanish equivalents for the first time in more than a year.

That showed that investors are now more concerned about Italy, the eurozone's third largest economy, than Spain, the fourth biggest. The yield on Italian 10-year bonds was at 6.13 per cent, while Spain's reached 6.04 per cent.

The euro recovered some of its recent losses, gaining 0.7 per cent to trade at $1.4163.

The protracted debate about raising the debt ceiling in the U.S. and confusion about Europe's strategy to fight its worsening debt crisis have undermined confidence in policy makers' willingness and ability to finally draw a line under the financial troubles that have plagued the Western world for four years.

In Europe, leaders' reluctance to increase the size of their bailout fund and quickly implement changes to its powers, such as giving it the ability to buy up government bonds, have left the currency union without a clear defence against market troubles over the summer.

Disagreements in the U.S. Congress, meanwhile, are set to herald more struggles about budget cuts at a time when many economists are calling for economic stimulus.

Oil prices fell in line with the general gloominess in the markets, since a weak economy hurts demand for energy. Crude fell $1.51 to $85.12.

Earlier in Asia, Japan's Nikkei 225 stock average slid 3.7 per cent to 9,299.88 and Hong Kong's Hang Seng dived 4.3 per cent to 20,946.14. China's Shanghai Composite Index lost 2.2 per cent to 2,626.42.

Japanese stocks were further weighed down by a further export-sapping appreciation in the yen despite Thursday's intervention in the markets by the Japanese government to weaken the currency. Finance Minister Yoshihiko Noda said authorities acted to protect the economic recovery following the March 11 earthquake and tsunami.

The dollar was 1 per cent lower at 78.42 yen. On Thursday, it spiked above 80 yen following the intervention, which was prompted by Monday's slide to 76.29 yen.