Markets showed signs of caution and the dollar declined against its counterparts as traders await a speech by Federal Reserve Chairman Ben Bernanke which is expected to show a slowing US economy.

Following Japan's downgrade on Wednesday wild rumours emerged that Germany could face a credit rating cut and unnerved German markets in early trading on Friday.

The FTSE 100 dropped 0.9 percent to 5,087.94 and the German Dax slumped 106.15 points to 5474.45, while the dollar fell to $1.4429 per Euro compared to $1.4379 in New York the day before.