European stocks retreated from record highs, while government bond yields, oil prices and the euro tumbled on Friday as the spectre of a fresh COVID-linked lockdown in Germany and other parts of Europe cast a fresh shadow over the global economy.

Markets went into a tailspin after news that Austria will become the first western European state to re-impose a full coronavirus lockdown to tackle a new wave of infections and signs that Germany might do the same.

Germany's health minister Jens Spahn warned the coronavirus situation in Europe's biggest economy was so grave that a lockdown, including for those vaccinated, cannot be ruled out.

"A total lockdown for Germany would be extremely bad news for the economic recovery," said Ludovic Colin, a senior portfolio manager at Swiss asset manager Vontobel.

"It's exactly what we saw in July, August of this year in parts of the world where the Delta was big, it (COVID-19) came back and it slows down the recovery again."

Such worries helped send oil prices down 3 percent, while investors made a dash for so-called safe assets such as government bonds, the dollar and the yen.

As the dollar rallied 0.4 percent, the euro slid to $1.1283, heading back towards a July 2020 low hit earlier this week. European and U.S. bond yields tumbled 5-6 basis points while equity markets reversed early-session gains.

While the pan-European STOXX 600 index slipped a third of a percent, Italian and Spanish shares slid more 1 percent and growth-sensitive banking stocks plunged almost 3.5 percent .

European Central Bank President Christine Lagarde doubled down on her cautious position on Friday, saying the ECB should not tighten policy as it could undermine recovery.

"It's not a game changer", said Emmanuel Cau, head of European equity strategy at Barclays, referring to latest COVID developments.

"Markets have been aware for a few weeks now that this winter will be difficult and that the vaccination rollout doesn't reduce lockdown risk by 100 percent", he said.

Still, the news in Europe rippled across world markets, taking Wall Street futures broadly lower although trading in NASDAQ futures pointed to a positive start for tech shares.

(With input from agencies)