• S&P cuts US credit rating from AAA to AA+ for first time • China says it has 'every right to demand' US tackles debt • Barack Obama repeats call for parties to work together

The United States has lost its top AAA credit rating for the first time, in a move that could severely undermine the recovery of the world's largest economy and prompt further calamitous falls on world stock markets next week.

Ratings agency Standard & Poor's decision to cut the debt rating after another dire day on the world stock markets on Friday could increase the cost of borrowing for the US and set off more panic selling when stock markets reopen on Monday.

The downgrade is an embarrassment for the Obama administration, coming less than a week after protracted wrangling among Republicans, Democrats and the White House took the US to the brink of default.

In his weekly radio address, Obama appealed to politicians from both parties to set aside partisanship and refocus on efforts to stimulate the stagnant economy.

"Congress reached an agreement that's going to allow us to make some progress in reducing our nation's budget deficit. And through this compromise, both parties are going to have to work together on a larger plan to get our nation's finances in order," Obama said.

China, the world's largest holder of US debt, condemned the "short-sighted" political wrangling in the US and said the world needed a new and stable global reserve currency.

In a comment article the official Xinhua news agency said China had "every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets. International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country."

S&P had held back cutting the rating earlier on Friday after the US government reportedly questioned its maths. But the agency insisted it was going ahead with the downgrade to AA-plus, saying the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilise the debt situation.

It is the first time S&P has issued a "negative" outlook on the US government since it began rating the credit-worthiness of railroad bonds in 1860. Michael Hewson, a market analyst at CMC Markets, warned: "This crisis will run and run, and could make Lehmans look like a Tupperware party."

The dramatic reversal of fortune for the world's largest economy means that US treasuries, once seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the UK, Germany or France. The move is likely to raise borrowing costs for the US government, companies and consumers.

Unnamed US officials had been telling the media that S&P's analysis was deeply flawed, but S&P said in a statement: "The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilise the government's medium-term debt dynamics."

Britain's stock market suffered another major sell-off on Friday, ending its worst week since the collapse of Lehman Brothers in 2008 with almost £150bn wiped off the value of the country's top 100 companies.

After a calamitous five days for stock markets on both sides of the Atlantic, the FTSE 100 closed 146 points lower at 5247 to record its third day of triple-digit declines – a trading pattern last witnessed in the immediate aftermath of Lehman's bankruptcy in September 2008.

Better-than-feared US employment figures failed to calm the markets. A rally prompted by news that America's economy generated an extra 117,000 jobs last month fizzled out within an hour in London, after the German government ruled out providing extra money for Europe's bailout fund, and rumours about the impending S&P move swirled around Wall Street.

After the European markets closed, Wall Street – which had suffered a 512-point fall on Thursday in one of its worse performances since 2008 – was encouraged by remarks from the Spanish government that the prime minister, José Luis Rodríguez Zapatero, agreed with the French president Nicolas Sarkozy's desire for greater co-ordination.

Even so, the Dow Jones Industrial Average, on a day of wild fluctuations, ended just 60 points higher. Tensions were also eased after Italy's prime minster, Silvio Berlusconi, promised to accelerate austerity measures by a year, and summoned a meeting of G7 finance ministers as soon as possible.

His comments followed rumours that the European Central Bank could reverse its hardline stance and begin buying Spanish and Italian government bonds in return for quicker reforms.

Dealers have been frustrated by the lack of urgency shown by the ECB in supporting Italy and Spain. During Thursday's market mayhem, they had bought only bonds issued by Ireland and Portugal.

Amid fears of an escalation in the crisis, Mervyn King, the governor of the Bank of England, held a conference call with David Cameron and the chancellor, George Osborne – both on holiday – to discuss the impact of the financial crash on Britain's banks and the struggling UK economy. The Bank is likely to cut its growth forecast for the UK when it publishes its latest quarterly inflation report on Wednesday.

"They discussed the financial situation and the chancellor asked the governor for his judgment," a Treasury source said. "They agreed to monitor the situation."

The source said the chancellor was keeping up the pressure on eurozone leaders to carry through the terms of the second bailout of Greece, which was intended to calm the markets when announced on 21 July but has failed to do so, with concerns widening to Italy and Spain. "What we are communicating to our European counterparts is you must deliver on what you have promised," a Treasury source said.

The US jobless rate went down from 9.2% to 9.1%. Analysts said the increase in non-farm payrolls was bigger than the 85,000 jump expected by Wall Street, but the figures were not good enough to make traders feel less gloomy about the possibility of a global double-dip recession.

Glenn Uniacke, senior dealer at Moneycorp, said there was relief at the US jobs figures. "With employment growth in the world's top consumer market an indicator of the future strength of the global economy, today's non-farm payroll figures gave the markets a modest upside surprise and President Obama some short-term reprieve following the blood-letting of the past week," he said.

"However, the data won't stop the rot and is not sufficient to change the bearish outlook from traders, with a sustained figure of 200,000-plus needed for any major positive impact on the unemployment rate. The markets were seen swinging wildly straight after the data, unsure how to interpret the ray of light in an otherwise gloomy week."

The British economist Baroness Vadera, a former Labour minister and G20 adviser who played a role in devising a rescue package for the international banking system at the time of the 2008 crash, said the current crisis could be even worse.

She told BBC Newsnight: "It feels as scary, but it is different. The reason it is potentially worse is that governments stepped in [in 2008-09] all over the world and saved the banking system in order to save their economies, but now who is going to step in to save governments?

"When we went into that crisis, interest rates were quite high, so we did have monetary policy to use as a tool and now we are at the outer limits of that. Lastly, we are currently facing quite a lot of inflationary pressures, particularly coming from commodities and emerging markets, so our room for manoeuvre is a lot more limited."