Madrid's IBEX 35 benchmark index of leading companies tumbled by almost 1.50 percent in early deals, but later rebounded to 6,469.8 points, up 0.48 percent from Thursday's closing level.
London's FTSE 100 index lost 0.63 percent to 5,413.26 points, Frankfurt's DAX 30 shed 0.49 percent to 6,114.03 points and in Paris the CAC 40 dropped 0.72 percent to 3,048.98 points.
The European single currency meanwhile slid to $1.2465, compared with $1.2561 late in New York on Thursday. It had struck a 23-month low late last week at $1.2288.
Asian share prices also fell on Friday as European debt woes and disappointment at US Fed chief Ben Bernanke's failure to commit to any new stimulus measures overshadowed a surprise Chinese interest rate cut.
Traders had been hoping for an indication that the central bank was willing to step in to protect the country from headwinds in Europe as well as weakness in China.
"Thursday's speech by Bernanke has so far marked the turning point for sentiment, at least in the short term," said IG Index analyst David Jones.
"A cautious outlook and no commitment to further economic stimulus from the US central bank has been seen as good an excuse as any by traders to put the brakes on the strong rally seen for blue-chips so far this week."
Fitch meanwhile slashed Spain's credit rating by three notches on Thursday, from A to BBB -- just above junk -- and warned it would likely stay in recession this year and next.
"Adding to the caution has been the downgrade of Spain by Fitch yesterday and rumours about an announcement due over the weekend regarding a rescue package for its beleaguered banking sector," said Jones.
"While markets would view some sort of aid for Spanish banks as welcome in the short term, it seems unlikely that this will be coming from the Spanish government -- and any involvement by the ECB or the IMF may be seen by some as a dangerous precedent to set."
Elsewhere, in closely watched comments on Thursday, Bernanke told Congress he was upbeat about "moderate" growth in the world's top economy and was "prepared to take action" to provide support, but gave no hint of stimulus measures.
Trader Anita Paluch at Gekko Global Markets added: "Sentiment was dented by Ben Bernanke's disappointing comments, which were clearly not what everyone hoped for."
The Fitch downgrade meanwhile moved Madrid a step closer to needing an international bailout, following the path of Greece, Ireland and Portugal, as it grapples with a fiscal crisis as well as a struggling banking sector.
The downgrade pushed yields on 10-year Spanish bonds sharply higher with the rate of return for investors on the secondary bond market up 6.177 percent from 6.061 percent at the close of trading on Thursday.
Countries considered to give safety from the turbulence saw yields fall with Germany's rate down to 1.299 percent, from 1.373 percent on Thursday and France's yield at 2.510 percent from 2.559 percent.
In earlier Asian deals, Asian markets fell sharply amid the mounting economic gloom. Hong Kong slipped 0.94 percent, Tokyo tumbled 2.09 percent, Shanghai lost 0.51 percent and Sydney fell 1.09 percent.
News that China was cutting interest rates for the first time in more than three years to bolster a slowing economy did little to improve sentiment.
The People's Bank of China said it would cut rates by 25 basis points -- the first cut since late 2008 during the financial crisis -- while also easing restrictions on deposit and lending rules.