LONDON  - Reeling world stock markets took another blow on Friday when Chinese shares sank 4 per cent, as concern about rising borrowing costs and soaring volatility put them on course for their worst week since the height of the euro zone crisis.

Losses on European bourses accelerated and volatility rose on Friday after a modestly lower open.  

China's drop ripped up market confidence again after a second 1,000-point loss this week on the U.S. Dow Jones Industrial index, putting it officially into correction territory. 

Capital flow figures also showed a record US$30 billion had already been yanked out of stocks during the rout, but even after that, Bank of America's closely followed "Bull & Bear" indicator was still flashing red and warning investors to sell.

"After the moves earlier this week market investor sentiment is fragile, and because of this we aren’t expecting the markets to immediately start moving higher once again," said J.P. Morgan Asset Management Global Market Strategist Kerry Craig.

"But given that U.S. markets are now in correction territory - with a 10 percent drop since the market peak in January - it’s likely that the most severe gyrations will hopefully have passed," he added.

U.S. futures were up 0.7 per cent early in the European trading day, but fell back by 1200 GMT. Dow Jones futures were last down 0.1 per cent, while S&P 500 futures edged up 0.1 per cent.

The main gauge of European stock volatility extended hit its highest level since June 2016, when the Brexit vote sent markets spiraling.

But implied volatility on the S&P 500 was calmer, falling back slightly ahead of the U.S. open.

There was limited reaction as the U.S. government staggered into another shutdown after lawmakers failed to meet a funding deal deadline, but it did play into many of the overarching market concerns this month.

The yield on benchmark 10-year U.S. Treasuries, a driver of global borrowing costs, was hovering at 2.84 per cent, just short of Monday's four-year high of 2.885 per cent.

Europe's mainstay - German Bunds - were barely budging too at 0.74 per cent, as their recent rise in yields left them flirting with another weekly rise, which would mark their longest run of weekly gains in 16 years. 

Higher yields are seen hurting equities as they increase loan costs for companies and ultimately consumers. They also present an alternative to investors who may reallocate some funds to bonds from equities.

CAUTION, FRAGILE CHINA

Chinese equities were hurt by the drop in global shares and by traders closing positions before the Lunar New Year holidays starting next week.  

The Shanghai Composite Index had tumbled as much as 6.0 per cent to its lowest since May 2017, and the blue chip CSI300 index dived 6.1 per cent. 

Both indexes pruned the losses to just over 4 per cent by the time they closed, but still had their largest single-day losses since February 2016.

Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong, said he was neutral on China equities due to valuations on China consumer-related industries and execution risks on deleveraging, especially financial deleveraging.

Japan's Nikkei also shed 2.3 per cent, sealing a weekly loss of 8.1 per cent - also its biggest since February 2016.

For MSCI's broadest index of world shares, the 47-country ACWI the slump was 6.2 per cent, which puts it on track for its biggest loss since September 2011.

At that point markets where being slammed by worries about Greek debt default and a collapse of the euro zone. The Federal Reserve was also starting one of its mass bond buying programs.

"The correction phase in equities could last through February and possibly into March," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management in Tokyo.

In currencies, the dollar index extended gains, edging up 0.3 percent. For the week, the dollar was on track to lose 1 per cent against the yen however as widespread risk aversion drove investors into the Japanese currency.

The euro was on course for its worst week against the dollar since November as it edged down to US$1.2237.. Sterling fell 0.7 per cent to $1.3810, on track for its worst week against the greenback since October.

Oil was still slippery with U.S. crude futures down 1.1 per cent at US$60.46 per barrel after hitting a seven-week trough of US$60.27 on Thursday. Brent crude fell for a sixth straight day too, down 0.8 per cent to US$64.32 per barrel.

There are signs supplies may be going up again after Iran announced plans to increase production and data showed U.S. crude output hitting record highs. 

Metals took another mauling. Bellwether industrial metal copper was on course for its worst week in two months, having dropped back below $7,000 a tonne, which had become something of a support crutch.