Global stocks ceded more ground on Friday, hurt by mounting concerns the US economy is heading into another recession and as some European lenders faced a short-term funding crunch, highlighting the risk of another banking crisis.

Nervous investors fled to the safety of core government bonds and gold, which hit a record high, with many seeking to unwind their holdings in riskier assets like stocks, commodities and higher-yielding currencies before the weekend.

European shares extended steep losses from Thursday, when they suffered their biggest daily slide in 2-1/2 years, with key indexes in Britain, France and Germany all in the red.

The FTSEurofirst index was down 1.25 percent, having already lost 15 percent this month to put it on track for its worst monthly decline since at least 1997.

The MSCI world equity index was down 1 percent. It too has lost nearly 15 percent since the start of month, and saw nearly $1.4 trillion wiped off valuations on Thursday and early on Friday -- equivalent to the combined economies of Greece, Ireland and Portugal.

"The heavy selling is on the back of fears over the state of global economic growth and the ability of European banks to withstand another freezing over of credit markets," said Ben Potter, strategist at IG Markets.

The sharp decline in stock markets is expected to have an adverse impact on household wealth, further undermining consumer confidence and demand in coming months. Heightened uncertainty over global growth could also see producers delaying decision-making, hitting output.

Earlier, a sharp decline in factory activity in the US Mid-Atlantic region to the lowest level since March 2009 stunned investors.

An unexpected fall in existing US home sales in July and a greater than expected rise in new claims for jobless benefits in the latest week also added to fears that the US economy's recovery could stall, sending it back into recession.

In Europe, renewed fears that the debt crisis could infect the region's financial system put pressure on short-term funding markets, forcing some European banks to pay higher rates for dollar loans and reviving memories of the dark days of late 2009 after the collapse of Lehman Brothers.

"There has been a panic about European banks. European governments are guaranteeing European banks, but if the governments are not stable themselves, that means the banks aren't stable," said Lothario Mendel, chief investment officer at Octopus Investments, which manages $4 billion.

The dollar was flat while the euro and commodity currencies like the Australian dollar were lower as stocks were sold off.

German Bund futures were supported near record highs as worries over a potential US slump and the euro zone debt crisis provided underlying support for safe-haven assets.  - Reuters