Volume was below average across financial markets heading into the weekend. Trading was choppy as perceived risky assets gave up much of their initial gains.

Anxiety over potential ratings downgrades in European sovereign debt and their repercussion on the region's banks underpinned safety bids for U.S. and German government bonds.

Fitch Ratings on Friday placed Belgium, Cyprus, France, Ireland, Italy, Slovenia and Spain on watch for possible downgrade and warned that a comprehensive solution to this festering problem is "technically and politically beyond reach".

It affirmed France's AAA-rating but could strip the second-biggest euro zone economy of its top-notch rating in two years.

Fitch's rating move and dire warning about Europe trumped optimism about the U.S. economy following recent upbeat data.

Government data released on Friday showed U.S. inflation pressure waning, fanning expectations the Federal Reserve could do more to boost economic growth. The latest consumer price report followed data on Thursday suggesting a possible pick-up in job growth, which has been meager during the current recovery.

Investor fears about the euro zone debt crisis persist as European leaders have not delivered more measures to contain the crisis after promising increased fiscal disciple at a summit in Brussels last week.

"There remains a great deal of concern about the direction of the euro zone," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. "We're still not trading on fundamentals and haven't been for some time."

The MSCI world equity index rose 0.3 percent after hitting a three-week low on Thursday. The index is still down 3.5 percent on the week.

The Dow Jones industrial average .DJI closed down 2.42 points, or 0.02 percent, at 11,866.39. The Standard & Poor's 500 Index .SPX was up 3.91 points, or 0.32 percent, at 1,219.66. The Nasdaq Composite Index .IXIC was up 14.32 points, or 0.56 percent, at 2,555.33.

On the week, the Dow fell 2.7 percent; the S&P lost 2.9 percent and the Nasdaq declined 3.5 percent. .N

European stocks .FTEU3 ended down 0.5 percent, erasing earlier gains on selling tied to expiration of options contracts. They finished 2.9 percent lower on the week.

Tokyo's Nikkei .N225 ended up 0.3 percent, reducing its weekly drop to 1.6 percent.

The euro clung to the $1.30 area versus the dollar after falling to 11-month lows on Wednesday. The 17-nation common currency was poised to close up 0.1 percent against the greenback after touching a high of $1.3084. It lost 2.6 percent against the dollar on the week.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For full multimedia coverage: r.reuters.com/xyt94s

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

PERIPHERAL YIELDS STAY HIGH

Long-term borrowing costs for Italy and Spain, whose heavy debt loads have worried investors and rating agencies, fell early in the trading day. That helped to steady the euro and briefly boosted European shares.

But they ratcheted back up to alarmingly high levels, with the yield on 10-year Italian government bonds creeping back above 7 percent, which analysts deem unsustainable for the euro zone's third-biggest economy to pay.

Italy faces a confidence vote in parliament, called to speed up approval of a 33 billion euro ($43 billion) austerity package aimed at restoring investor confidence.

Amid these political developments, worries linger about the euro zone debt crisis and have supported U.S. Treasuries and German Bunds. They pushed aside optimism about the U.S. economy and hopes the European Central Bank will ultimately step in to buy bonds of troubled euro zone peripheral countries.

Bund futures ended up 1 point at 138.66 at their highest in four weeks. Benchmark 10-year Treasury notes were up 17/32 in price for a yield of 1.85 percent, touching their lowest levels in early October.

Gold, another traditional safehaven asset, snapped a four-day losing streak tied to fund liquidation.

Spot bullion in London ended up 1.5 percent at $1,593.68 an ounce after touching the lowest level since late September on Thursday. For the week, gold fell 6.8 percent, the biggest weekly decline since late September.

The oil market struggled to hold early gains on nagging worries about the euro zone crisis causing a global economic slowdown. February Brent crude futures settled down 25 cents at $103.35 a barrel, while spot U.S. oil futures settled down 34 cents at $93.53, briefly falling below their 300-day moving average.

• A Permanent Economic Emergency