NEW YORK Wall Street on Friday strung together two days of gains for the first time since mid-July after a whipsaw week as investors reacted to the first ever downgrade of the United States' credit rating and rising worries over European banks.
European stock markets also got a reprieve as a ban on short-selling of financial shares threw the battered sector a lifeline.
But markets did not escape the week unscathed. Credit tightened in a reminder of the tensions seen in 2008 as investors grew concerned that banks are too exposed to euro zone debt. Key short-term funding measures showed costs rising for banks to borrow money to cover obligations.
The market turmoil sent fund investors out of both stocks and bonds and into money markets and precious metals in the week ended August 10, data from EPFR Global showed.
"Once unthinkable things have happened, such as the U.S. losing its AAA rating," said Maneesh Deshpande, head of U.S. equity derivatives strategy at Barclays Capital.
"Investors are literally feeling the earth shifting under their feet. You just don't know what else you thought of as rock solid might turn out to be untrue."
World shares as measured by the MSCI world equity index lost 1.6 percent for the week, though they were up 1.1 percent Friday. U.S. stocks recorded their worst three-week decline since March of 2009 when they hit 12-year lows.
Composite volume on Wall Street was about 9 billion shares on Friday, far below the almost 16 billion shares traded daily on average this week.
More than 150 million stock options changed hands during the week, according to unofficial data from clearinghouse OCC. The record week included an all-time one-day record of 41.5 million contracts traded on Monday.
The search for safety pushed benchmark U.S. Treasuries to their largest one-week gain in two-and-a-half years. Ten-year note yields plunged 30 basis points this week and at one point tested record lows set in December 2008.
Ten-year notes were last up 25/32 in price to yield 2.28 percent, down from 2.56 basis points a week ago.
U.S. stocks ended modestly higher as investors took comfort from U.S. retail sales that rose in July for the biggest gain since March. That was tempered somewhat by a separate report that showed consumer sentiment in early August fell to the lowest since May 1980.
European shares closed up 3.6 percent. Bank shares, which have fallen sharply in recent days, led the move higher after the ban on short selling imposed by France, Italy, Spain and Belgium.
The Dow Jones industrial average gained 125.71 points, or 1.13 percent, to 11,269.02. The Standard & Poor's 500 Index added 6.17 points, or 0.53 percent, to 1,178.81. The Nasdaq Composite Index rose 15.30 points, or 0.61 percent, to 2,507.98.
EURO ZONE WOES
The four countries banned short selling -- borrowing shares and selling them in expectation the price will fall -- of a group of banks and financial institutions after a flurry of rumors knocked a third of the value off some European bank shares this month.
Traders said the measure would provide temporary relief to jittery investors. But concerns about euro zone debt problems and a deteriorating outlook for the global economy are likely to keep trading erratic.
"Data from various regulators of late have shown there is no short-selling activity out of the norm," said Davide Burani, financial analyst at Italian fund manager Horatius.
Troubles in the euro zone were not very far from investors' minds as Italian Prime Minister Silvio Berlusconi announced a painful mix of tax hikes and spending cuts to meet European Central Bank demands for action on shoring up the country's strained public finances.
The strain in the dollar funding market remains high, as investors are skittish to lend their dollars due to doubts that European authorities could solve the debt crisis.
The benchmark London interbank offered rate on three-month dollars hit four-month highs of 0.29006 percent versus 0.28617 percent on Thursday. The rate is a gauge of how willing banks are to lend to one another.
The Swiss franc fell sharply for a second session.
Safe-haven gold extended the previous session's retreat from record highs. US gold futures for December delivery were down 3.6 percent at $1,747.80 an ounce.