Top European shares .FTEU3 were down 1 percent at midmorning, the euro had retreated to below $1.25 after a two-week high on Thursday, and Brent crude slid $2.10 to $97.86 a barrel.

The lack of a clear signal on Thursday from Federal Reserve Chairman Ben Bernanke on imminent quantitative easing to stimulate the U.S. economy at its June 19-20 meeting overshadowed what had been a positive reaction in world financial markets to a Chinese interest rate cut.

Instead markets worried about the state of the euro zone and in particular how Madrid can solve the crisis at many of its banks caused by recession and a property market crash, plus the possibility that Greece might leave the currency bloc.

"Comments by Bernanke poured cold water on market expectations that central banks would offer more to revive their economies," said Victor Shum, senior partner at oil consultancy Purvin & Gertz. "The focus of the market has shifted since worries about Greece and Europe have returned."

EU and German sources said Spain is expected to request European aid for its banks at the weekend to forestall worsening market turmoil, becoming the fourth and biggest country to seek assistance since the euro zone's debt crisis began.

BANK AUDIT

A Spanish government spokeswoman said she was unaware of any pending announcement on a bank rescue, referring to Prime Minister Mariano Rajoy's statement on Thursday that he was awaiting results of an audit of the banks.

An International Monetary Fund report on Spanish banks due for release on Monday will show the lenders need a cash injection of at least 40 billion euros ($50 billion), sources in the financial sector said on Thursday.

MSCI's world equity index .MIWD00000PUS was down 0.8 percent at 298.74, but it is still set to post the best week since late January, due largely to the belief that central banks will be forced into action eventually by slowing economic growth.

Flagging demand from the euro zone caused a big drop in German exports and imports in April, trade figures on Friday showed, while a deluge of May Chinese data due over the weekend is expected to paint a grim picture.

Germany's Bundesbank raised its 2012 growth outlook for Europe's largest economy on Friday, saying it expected global and domestic demand to make up for slowing business with debt-strained euro zone member states.

Germany has been a growth driver for the euro zone, but recent data showed it was not immune to the bloc's crisis as slowing demand from abroad drove down industrial orders and output.

"Provided that the sovereign debt crisis in the euro area does not escalate, I assume that expansionary forces will keep the upper hand," said Bundesbank President Jens Weidmann.

In the debt market, Spanish government bond yields and prices of safe-haven German debt rose after Fitch cut Spain's credit rating by three notches on Thursday, complicating Madrid's quest to overcome the banking crisis.

"The downgrade was not totally out of the blue. It's been on the cards," one trader said. "But with this talk about bailouts, it could still get nasty."

Spanish 10-year government bond yields last traded 5 basis points higher on the day at 6.16 percent, having fallen to 6 percent on Thursday after a bond sale went better than expected.

Bund futures were 68 ticks higher on the day at 143.74, with 10-year cash yields 7 basis points lower at 1.314 percent.

(Reporting by Richard Hubbard and David Stamp; Editing by Will Waterman)

• A Permanent Economic Emergency