Sterling sank more than one percent to under $1.12 after Truss dismissed Kwarteng. It fell even lower after Truss appointed Jeremy Hunt as her new finance minister and announced a dramatic policy U-turn, before clawing back some of its losses.

In her first Downing Street press conference, Truss stated the "need to act now to reassure the markets", abandoned her plans to eliminate an increase in corporation tax and said spending would not increase as rapidly as planned. "The soap opera that is UK politics continues to dominate FX (forex) markets Friday," said Stephen Innes, managing partner at SPI Asset Management.

UK 10-year government bond yields rose after the Bank of England publicly stated it would end its costly market interventions on Friday. "Unfortunately for Truss, her swift ability to spook markets with a swathe of unfunded spending plans is now being followed by yet another rise in yields, as markets wonder whether we could soon see another push to replace her," said Joshua Mahony, senior market analyst at online trading platform IG.

London's FTSE 100 ended the day with a gain of 0.1 percent, having given up most of its earlier gains because Truss's U-turn left her position fragile. Berenberg bank Senior Economist Kallum Pickering said "the policy U-turn is a major humiliation for Truss" and weakens her politically. "It is not easy to see how Truss –- whose personal mandate is now in tatters -- can continue as PM for long," he added.

While European markets ended higher, Wall Street failed to hold onto gains made on Thursday in a surprising rally despite data showing strong inflationary pressures in the United States. A survey out on Friday showed inflation expectations were on the rise, a signal likely to worry policymakers at the US Federal Reserve, who are trying to not only tamp down inflation but ensure that expectations about price rises do not become entrenched.

"It is one report, but it coincides with a hot inflation report and a market that is fearful that it keeps mistiming when the Fed will pivot," said Edward Moya at OANDA. Expectations that the Fed will be able to quickly pivot -- or begin reducing interest rates -- helped spur a brief rally in stocks last week.

Third quarter earnings season got into full swing, with a number of large banks, including JPMorgan Chase and Citigroup, reporting lower earnings and setting aside more funds in preparation for a possible recession, although their performances topped analyst estimates. "None of those banks missed consensus earnings estimates, like investment bank Morgan Stanley did, yet their reports were laced with increased provisions for credit losses," noted market analyst Patrick O'Hare at Briefing.com.