LONDON -- European and Asian stocks skidded Thursday as investors reacted sharply to the unfolding debt crisis in the Persian Gulf emirate of Dubai, setting the stage for a weak start for Wall Street when U.S. markets reopen Friday.

In Europe, shares fell Thursday more than 3%, their biggest one-day drop since April. In Asia, The Shanghai stock market lost 4%, while Bombay and Hong Kong each dropped about 2%. Gold prices, after clocking yet another record, retreated modestly in European trading. The dollar rebounded after...