Europe's leading stock indexes closed higher on Friday, reversing earlier sharp losses driven by a shock debt announcement in Dubai that alarmed markets worldwide.

London's FTSE 100 index of leading shares closed 0.99 percent higher at 5245.73 points. Frankfurt's DAX rose 1.27 percent to 5685.61 points and in Paris the CAC 40 gained 1.15 percent to close at 3721.45.

The dollar struck a 14-year low against the yen but was broadly higher against other currencies amid a flight from risk.

Wall Street volumes were light as many traders were absent for the holiday-shortened session that closed at 1:00 pm (1800 GMT). No economic reports were released.

The two foreign banks with the heaviest exposure to Dubai ? HSBC and Standard Chartered ? saw their shares fall sharply in Hong Kong before recovering in London.

HSBC closed 0.10 percent higher and Standard Chartered gained 0.40 percent. Earlier in Hong Kong HSBC dropped 7.6 percent and Standard Chartered fell 8.6 percent.

On Wall Street, the S&P banking index shed 2.57 percent.

Citigroup slid 2.64 percent to 4.06 dollars. Citi is reportedly the US bank most exposed to the United Arab Emirates, a federation of Abu Dhabi, Dubai and five other city states.

Bank of America fell 3.01 percent to 15.47 dollars, JPMorgan Chase slid 1.97 percent to 41.33 dollars and Goldman Sachs tumbled 2.82 percent to 164.16 dollars.

Analysts at Exane BNP Paribas said that "so far the situation in Dubai seems contained, but a rise in government bond yields due to a higher risk premium because of soaring budget deficits is one of the main risks" for 2010.