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NEW YORK (Reuters) - U.S. stocks closed out its worst week this year and the euro fell on Friday after disappointing Chinese growth data stoked worries about the strength of the global economy and a rise in Spain's borrowing costs revived fears about the debt-plagued euro zone.
A sharp re-emergence of fears over contagion from the euro zone debt crisis took a steep toll on bank shares in both Europe and the United States, as well as dragging down the euro against the dollar for the first time in three days.
The yield on Spain's 10-year government bonds came close to testing 2012 highs, and the cost to insure against a Spanish default jumped to a record high.
"Everyone is looking for global growth, but the slowing in China and the rising yields in Europe are creating questions about how strong we might expect it to be," said Brad Sorensen, director of market and sector analysis at Charles Schwab in Denver. "That's leading to a correction here, with financials especially taking a hit."
Reduced optimism about global growth spurred hedge funds and other investors to shift cash into safe-haven U.S. and German government debt ahead of the weekend, analysts and traders said.
China, the world's second-largest economy, reported first-quarter growth of 8.1 percent, the weakest in almost three years and below market expectations for an 8.3 percent rate. Market talk on Thursday that growth could come in at 9 percent had spurred a rally in riskier assets.
"The Chinese GDP number was weaker than expected, and everyone had used it as an excuse to rally yesterday," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
Most commodities fell on Friday on concerns about slowing demand, but oil prices in London closed higher on a late flurry of buying, while equity markets fell on the fears about Europe.
The Dow Jones industrial average .DJI ended down 136.99 points, or 1.05 percent, at 12,849.59. The Standard & Poor's 500 Index .SPX closed down 17.30 points, or 1.25 percent, at 1,370.27. The Nasdaq Composite Index .IXIC finished down 44.22 points, or 1.45 percent, at 3,011.33. The S&P fell almost 2 percent on the week, its biggest weekly drop so far this year, while the Nasdaq declined 2.2 percent on the week for its first back-to-back weeks of losses since November. The Dow was fell 1.4 percent on the week, shaving its year-to-date gain to 5.4 percent.
"We are seeing some really serious stuff in the European credit markets," said James Dailey, portfolio manager at the TEAM Asset Strategy Fund in Harrisburg, Pennsylvania.
"The concern is now on global recession. The data out of China and our consumer sentiment data point to a recession, which the market has been in denial about for a while."
U.S. data on Friday showed a modest decline in consumer sentiment in early April.
Banks were the biggest losers. The S&P financial sector index .GSPF fell 2.52 percent despite earnings from JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N) that beat Wall Street's expectations. JPMorgan shares slid 3.6 percent to $43.21, and Wells Fargo shares fell 3.5 percent to $32.84.
The FTSEurofirst 300 .FTEU3 index of top European shares closed down 16.46 points, or 1.6 percent, at 1,027.73. The index was down 2.3 percent for the week for a fourth consecutive weekly loss.
"It is hard for the market to rally when the European bank sector keeps being under huge pressure. It tells us that the problems have not been solved; they have only been postponed," said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500 million of assets.
The MSCI world stock index .MIWD00000PUS shed 1.1 percent at 322.92 after touching its lowest level in more than two months. It lost 1.6 percent on the week.
Spain's government bond yields rose and the cost of insuring its debt hit an all-time high as its banks borrowed a record amount from the European Central Bank. That underscored fears about the finances of the euro zone's fourth-biggest economy. Spain tests market appetite for its debt next week.
The yield on 10-year Spanish sovereign debt flirted with 6 percent, a 4-1/2-month high. The cost to insure against a Spanish default jumped to 500 basis points for the first time, according to data firm Markit.
That means it costs $504,000 annually to buy $10 million of protection against a Spanish default using a five-year credit default swap (CDS) contract.
The euro was down 0.8 percent against the dollar at $1.3073, knocking it into a 0.2 percent deficit against the greenback for the week. Still, the common currency was not expected to break out of the lower end of the $1.30-$1.35 range it has traded in since January.
The dollar gained versus other major currencies. The dollar index .DXY rose 0.8 percent to 79.900, eking out a 0.1 percent gain on the week. <FRX/>
May Brent crude futures in London expired up 12 cents or 0.10 percent at $121.83 a barrel, erasing earlier losses. But the Brent complex posted its fourth straight weekly decline, matching a similar losing streak in late September.
U.S. oil settled down 81 cents or 0.78 percent, to $102.83 per barrel, falling 0.4 percent on the week on worries about weakening global energy demand. <O/R>
In other commodity trading, spot gold fell 1.2 percent to $1,654.86 an ounce with losses capped on expectations for further monetary easing from Beijing after the weaker first-quarter growth data. Copper prices fell 3 percent to the lowest level since mid-January over worries about demand from China, the world's top metals consumer.
In the bond market, benchmark 10-year U.S. Treasury notes last traded up 18/32 in price with the yield at 1.99 percent, down 6 basis points from Thursday. <US/>
German Bund futures were up 56 basis points at 140.36, retracing the losses from the prior two days.
Additional reporting by Ryan Vlastelica in New York; Mike Peacock, Manolo Serapio Jr., Chikako Mogi, Ana Nicolaci da Costa and Nia Williams in London; Editing by Leslie Adler