Losses accelerated and the Australian dollar, a bellwether for investor appetite for risk, dived after EU diplomats said it had been agreed that a new permanent bailout fund would not have a banking license, meaning it would not be able to borrow from the European Central Bank (ECB).
The euro and the Aussie then pared some losses after the leaders said the euro zone planned to make available up to 200 billion euros to the International Monetary Fund to beef up its resources.
MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS slid as much as 2.8 percent for a weekly drop of 3.5 percent, led by the risk-sensitive materials sector .MIAPJMT00PUS, while Japan's Nikkei stock average .N225 dropped 1.5 percent.
The euro pulled back from a session low around $1.3310, just above a one-week low of $1.3289 touched the day before, to stand at $1.3332, while Wall Street stock futures dipped as much as 0.4 percent.
"The knee-jerk was to the downside, even though we knew every single one of the headlines and there was nothing that we didn't know 24 hours ago," said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong. "What we can take away from this is that markets are very nervous."
European shares were set to fall on Friday, with financial spreadbetters predicting Britain's FTSE 100 .FTSE to open down 0.8 percent, Germany's DAX .GDAXI falling 1 percent, and France's CAC-40 .FCHI to drop 0.7 percent.
In a further sign that Europe's debt crisis is undermining global growth, China said its annual inflation rate fell to 4.2 percent last month, while the November producer price index tumbled to 2.7 percent from October's 5 percent rise, raising expectations of more easing to combat deteriorating growth.
EU diplomats, updating reporters after talks in Brussels late on Thursday had stretched into the early hours of Friday, said the leaders had failed to secure backing from all 27 countries to change the EU treaty, meaning any deal would now likely involve the 17 euro zone countries, plus any others that wanted to join.
The summit, which concludes later on Friday, looked set to adopt a new system of fiscal discipline, but sentiment worsened after the ECB dashed hopes it would serve as lender of last resort, and as Germany rejected a long-term goal of issuing common euro zone bonds.
"Markets won't be relieved by Europe agreeing to fiscal discipline alone, and sentiment will only improve if the ECB, the ultimate source of funds, agrees to step in," said Junya Tanase, chief currency strategist at JPMorgan Chase in Tokyo.
STAGNANT ON KEY ISSUE
The ECB on Thursday cut its key interest rate by 25 basis points to 1 percent, introduced ultra-long euro liquidity loans, and widened the collateral base in a bid to ease the strain in money markets.
Financial strains are likely to remain strong until a scheme for containing the debt crisis is firmly set in place, as banks, with huge exposure to euro zone sovereign bonds, refrain from lending in the markets.
"Fiscal discipline can't be achieved overnight and in the meantime, credit contraction will intensify, so the most urgent task for policymakers is to take decisive measures to put a firm cap on bond yields and relieve funding pressures," said Takeo Okuhara, a fund manager at Daiwa SB Investments.
European sovereign debt yields had spiked on Thursday, pushing 10-year Italian yields up to 6.51 percent and Spanish 10-year yields up to 5.82 percent.
The risk-averse sentiment carried over to Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index widening by 8 basis points on Friday.
"The markets were priced for perfection from the summit, it looks like we're not going to get it," said David Scutt, a trader at Arab Bank in Sydney.
Risk-aversion pushed down the 10-year Japanese government bond yield to 1.015 percent, the lowest since November 25, while spot gold inched up 0.2 percent to $1,710.80 an ounce on the back of a fall in stocks.
Oil prices extended falls on Friday, with U.S. crude futures down 0.4 percent after settling down more than 2 percent the day before for its steepest single-day loss since November 17.
U.S. grain futures eased on Friday, with wheat extending losses in the Asian session.