Fresh turmoil on the world's financial markets on Friday saw gold rise to record levels, the dollar sink to its lowest-ever level against the Japanese yen, and share prices gyrate wildly in Europe and North America.

A day of rumours and extreme nervousness saw shares in Britain's biggest companies lose all the gains in the market seen since the FTSE 100 index bottomed out on 11 August.

Despite an afternoon rally, prompted by speculation that the US Federal Reserve was about to hold an emergency meeting to tackle the growing sense of market panic, the FTSE closed 51.47 points down at 5040.76, a decline of 1%. The Dow Jones industrial average also lost confidence later in the day as no announcement from the Fed was forthcoming and closed down 172.93 at 10,817.65, a fall of 1.6%.

Earlier, London shares had collapsed after Thursday's heavy selling on Wall Street prompted steep falls on Asian bourses. Fears that the global economy was heading for a double-dip recession, and signs that Europe's bailout of Greece could collapse, saw the FTSE lose more than 3% of its value at one stage, sending it well below the 5000 mark. The steadier start to trading on Wall Street helped calm nerves in the City at the end of another frenetic week that saw markets once again focus on their two major concerns: growth and the fragility of Europe's single currency.

"This week has seen a continuation of the trend of weaker than expected data and political reaction to the European problems which pretty much amounts to 'let's have a get-together a couple of times a year'," said Gary Jenkins, an analyst at Evolution Securities.

The jittery atmosphere sent investors heading once again to the safe havens of the Swiss franc, the Japanese yen and gold. Bullion rose as high as $1,881 an ounce, with some dealers expecting it to test the $2,000 an ounce level over the coming weeks.

On the foreign exchanges, the dollar dropped to just under ¥76 against the Japanese currency and was also down against the Swiss franc and the pound. The dollar's fall helped underpin oil prices, with a barrel of Brent crude trading almost $2 higher at just under $109 a barrel.

Switzerland's two biggest banks, UBS and Credit Suisse, have denied that they made use of the Federal Reserve's swap facility via the Swiss National Bank, insisting they have no liquidity problems.

There had been speculation that a Swiss bank had accessed the US liquidity facility via a $200m repurchase transaction with the SNB last week.

Evangelos Venizelos, Greece's finance minister, said his country's €109bn bail-out was not in doubt, despite the fissures within Europe being laid bare by the demands of five countries for collateral in exchange for paying into a rescue fund for the weaker countries in the monetary union. Venizelos also said the recession in his financially troubled country could be deeper than originally predicted for this year, with output potentially shrinking by more than 4.5%.

His comments came a day after the Netherlands, Slovenia, Austria and Slovakia said on Thursday they wanted hundreds of millions of euros in collateral, in the same vein as Finland, which struck a deal with the Greek government earlier in the week to receive cash as security for its part of the bailout.

Brussels sought to ease fears by stressing that Olli Rehn, Europe's economic and monetary affairs commissioner, was looking at a plan for common European bonds, seen as a step towards closer financial integration among the 17 single-currency nations.

European banking shares fell to near two-and-a-half-year lows, dragged down by rumours about banks' potential losses on bonds issued by heavily indebted governments.

Earlier, Asian shares took a beating, with Japan's Nikkei 225 index dropping 2.5% to 8719.24 and Hong Kong's Hang Seng down 3.1% to 19,399.92.

Concerns that weak growth in Europe and the US would hit China's exports affected sentiment in Shanghai, where the stock market's composite index ended 1% lower at 2534.6 after dipping almost 2% earlier in the day.

Some strategists said it was a good time to pick up stocks cheaply. Nick Bubb, retail analyst at Arden Partners, said: "If you want to buy when there's blood on the streets, and on the screens, then today is a good day to pick up good quality, high-yielding general retail defensives like Marks & Spencer and WH Smith, as well as undervalued global retailers like Inchcape and Kingfisher. And in the food retailers, we wouldn't want to be short of Wm Morrison, ahead of its interims on 8 September."

Investors continued to swap risky investments for those viewed as safe. The yield on the benchmark 10-year US Treasury bill rose, but only slightly, to 2.10%, after hitting a record low of just below 2% on Thursday. Bond yields fall as their prices rise in line with demand.