(Adds close of U.S. markets)
* Turkish lira plunges to record low
* ECB worried about European bank exposure to Turkey -FT
* Bank shares fall on exposure concerns
* Euro falls to lowest since July 2017
* Yen climbs, bond yields fall
By Herbert Lash and Ritvik Carvalho
NEW YORK/LONDON, Aug 10 (Reuters) - A plunge in the Turkish lira rocked global equities and emerging markets on Friday and fear of further fallout sent investors scurrying for safety in assets like the yen and U.S. government bonds.
European shares and a gauge of global equity markets closed down more than 1 percent, while Wall Street also fell, though not as much. Germany's DAX index slid 2 percent.
The lira fell as much as 18 percent against the dollar in its worst day since Turkey's financial crisis of 2001. The plunge followed a deepening rift with the United States, worries about its own economy and lack of action from policymakers.
President Tayyip Erdogan told Turks to swap gold and dollars into lira as the currency tumbled after President Donald Trump doubled U.S. tariffs on metals imports from Turkey.
Turkey later warned the United States that sanctions and pressure would only serve to harm ties between the two NATO allies, adding Ankara would continue to retaliate as necessary against U.S. tariffs. The lira has fallen more than 40 percent this year, fanning worries about a full-blown economic crisis.
Bank shares across Europe fell and the euro slipped to its lowest since July 2017 as the Financial Times quoted sources as saying the European Central Bank was concerned about European lenders' exposure to Turkey. The country is not a member of the European Union but is economically linked to it.
The dollar rose as exposure to Turkey could impact European banks and spark a domino effect as people begin to pull out of those banks and into U.S. assets, said Gregan Anderson, macroeconomic strategist at brokerage Bulltick LLC.
The flare-up in tensions has made it difficult for global investors to justify remaining in Europe and is negative for emerging markets, he said.
Policy errors created the current situation, with Turkey's central bank decision not to raise rates in their last meeting a key driver, said Charlie Wilson, an emerging markets-focused portfolio manager at Thornburg Investment Management in Santa Fe, New Mexico.
"The lira has been weakening since and it's coming to a head today," Wilson said, adding the downward spiral will continue if Turkey insists on a soft landing.
"The only way to correct these policy mistakes is to really make some concrete changes on the fiscal and monetary side."
Shares in France's BNP Paribas, Italy's UniCredit and Spain's BBVA, the banks seen as most exposed to Turkey, fell 3 percent or more.
An index of regional banking shares closed down 3.2 percent while the pan-European STOXX 600 index fell 1.07 percent.
The MSCI All-Country World index, which tracks shares in 47 countries, was down 1.22 percent and erased all its gains for the week.
Wall Street also fell.
The Dow Jones Industrial Average fell 196.09 points, or 0.77 percent, to 25,313.14. The S&P 500 lost 20.3 points, or 0.71 percent, to 2,833.28 and the Nasdaq Composite dropped 52.67 points, or 0.67 percent, to 7,839.11.
Investors piled into "safe" government debt, with German yields hitting three-week lows and the yield on the benchmark U.S. 10-year Treasury note falling to 2.8750 percent as investors sought its safety.
The safe-haven Japanese yen hit a one-month high of 113.38 against the dollar, and was last traded at 110.91.
The dollar index, which measures the greenback's strength against a group of six major currencies, breached 96, taking it to its highest level since July 2017. It was last up 0.84 percent at 96.309.
Emerging market stocks lost 1.66 percent, while the Mexican peso, a proxy for emerging market currencies, shed 1.29 percent to the dollar.
Adding to emerging market currency woes was the Russian ruble, which weakened to 67.6825 to the dollar. Overnight it had retreated to its lowest since November 2016 on threats of new U.S. sanctions, weakening beyond the psychologically important 65-per-dollar threshold.
Oil prices rose more than 1 percent as U.S. sanctions against Iran looked set to tighten supply, but futures remained lower for the week as investors worried that global trade disputes could slow economic growth and hurt demand for energy.
Benchmark Brent crude oil rose 74 cents to settle at $72.81 a barrel. U.S. light crude settled 82 cents higher at $67.33 a barrel.
U.S. gold futures for December delivery settled down 90 cents, or 0.1 percent, at $1,219 per ounce.
Reporting by Ritvik Carvalho Writing by Herbert Lash Additional reporting by Dhara Ranasinghe in LONDON, Rodrigo Campos in New York, and Asia markets team; Editing by Janet Lawrence, Nick Zieminski and Diane Craft