The euro dropped against the dollar a day after eurozone growth forecasts were slashed on concerns over the ongoing debt crisis.

IMF chief Christine Lagarde, delivering a speech in London on Friday ahead of the G7 meeting in France, urged countries to "act now and act boldly" to kick start faltering economic recovery.

"All (market) attention will be on Obama's proposals and on the start of the G7 meeting of finance ministers and central bankers," Dolmen Stockbrokers said in a note.

"There is some expectation of a discussion on co-ordinated monetary policy response to support growth, but we see that as unlikely."

In early European stock market trading, London's FTSE 100 index dropped 0.63 percent to 5,305.32 points, Frankfurt's DAX 30 index slid 1.60 percent to 5,322.94 points and in Paris the CAC 40 shed 1.70 percent to 3,033.94. Madrid slumped 1.69 percent, Milan 2.05 percent and Stockholm 1.24 percent.

The euro fell to $1.3882 from $1.3880 late in New York on Thursday, when the European Central Bank held interest rates at 1.50 percent and ECB President Jean-Claude Trichet explained that the overall outlook for growth and inflation had changed over the past four weeks.

"The key factor that has helped the dollar versus the euro was the monetary policy press conference from ECB President Trichet yesterday that confirmed a notable back-track from the ECB in regard to the outlook for economic growth," said Derek Halpenny, currency economist at The Bank of Tokyo-Mitsubishi UFJ.

"Another reason for the euro decline is the worsening situation in regard to Greece. The market is now pricing for substantial default and the scale of economic contraction remains alarming."

The finance ministers and central bankers from the G7 major industrialised economies meeting on Friday will also focus on the health of European banking system, which in August was shaken by sudden sell-offs sparked by investor anxiety.

Speaking ahead of the gathering, Lagarde said in London: "The key message I wish to convey today is that countries must act now -- and act boldly -- to steer their economies through this dangerous new phase of the recovery."

The world was suffering from "a crisis of confidence" amid heightened fears over the health of banks and sovereign debt, she said in an address to the Royal Institute for International Affairs think-tank.

"All this is happening at a time when the scope for policy action is considerably narrower than when the crisis first erupted," Lagarde said. "But while the policy options may be fewer, there is a path to recovery."

Asian stocks mostly fell on Friday as China's August inflation rate remained on the high side, while Obama's plan to boost jobs in the world's biggest economy failed to inspire markets.

Tokyo closed down 0.63 percent to 8,737.66 points, as official data showed Japan's economy shrank more than first thought in the April-June quarter.

Overnight, Obama proposed a $447 billion plan to revive the US economy, which includes cutting payroll taxes for employees and businesses, spending billions fixing roads and bridges and extending and revamping unemployment benefits.

"Equity markets will be weak today as investors await comments from the Republicans in the US to determine how likely it will be for Obama's proposals to be implemented," Dolmen Stockbrokers said.

US stocks closed down ahead of the speech, with the Dow Jones Industrial Average tumbling 1.04 percent to finish at 11,295.81 points.

Also on Thursday, the Organisation for Economic Cooperation and Development (OECD) and European Central Bank slashed their eurozone growth forecasts.

The OECD said it expects the eurozone to grow 1.4 percent in the third quarter of 2011 and shrink 0.4 percent in the final three months.

It said Germany, the main driving force in the region, could grow 2.6 percent in the third quarter but was set to contract 1.4 percent in the fourth.

Copyright AFP (Agence France-Presse), 2011