NEW YORK, March 18 (Reuters) - Global stock markets fell on Monday as concerns over European sovereign debt returned to the forefront after the euro zone's decision on partially funding a bailout of Cyprus by taxing bank deposits.
The declines gave US equities investors the opportunity to lock in profits after last week's extended rally, and trading was volatile throughout the day. Equities cut their losses midway through the session, but returned to solidly lower territory in the final hours of US trading, led by banks.
The Cyprus move hit confidence in the European banking sector, sparking concerns that authorities might go after depositors in other euro zone nations. The euro and bonds of troubled European sovereign debtors also fell.
"Will authorities be able to convince markets that this proposal is only for this unique situation, for such a small country where the banking system is more of a tax shelter? If they can't, that might cause new concerns about Europe's banking system," said Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati.
The bloc struck a deal on Saturday to give Cyprus rescue loans worth 10 billion euros ($13 billion), but defied warnings - including from the European Central Bank - and imposed a levy that would cost those with cash in the island's banks between 6.75 and 9.9 percent of their money.
Cyprus' parliament put off a vote on the measure, which has shaken depositors' confidence in banks across the continent, until Tuesday. With public anger at the deal widespread, the government said it was looking to reduce the losses for small savers.
"Investors realize Cyprus won't become a full-fledged capital problem, but they don't want to be complacent, especially in the context of how far we've come so far this year," said Sargen, who helps oversee more than $45 billion.
The deal staved off a default, which would have undermined the promise that last year's Greek debt write-down was a one-time event. But the move to hit depositors takes the euro zone crisis into unprecedented territory.
The initial response of investors was unambiguous. European shares followed Asian indexes lower and the euro fell to a three-month low, while safe-haven assets such as gold and German and US government bonds jumped.
Italian and Spanish bond yields both rose sharply, reflecting fears about the weakness of the two euro zone economies and the size of their debt burdens.
European shares closed 0.3 percent lower, having at one point been down as much as 1.4 percent. London's FTSE 100 , Frankfurt's DAX and Paris's CAC-40 were down 0.5 percent, 0.4 percent and 0.5 percent respectively, leaving MSCI's global share index down 1 percent.
In the United States, the Dow Jones industrial average ended down 62.05 points, or 0.43 percent, at 14,452.06. The Standard & Poor's 500 Index was down 8.59 points, or 0.55 percent, at 1,552.11. The Nasdaq Composite Index was down 11.48 points, or 0.35 percent, at 3,237.59.
Financial shares were among the weakest, with the S&P financial index down 1 percent, while euro zone bank shares lost 2.6 percent.
CENTRAL BANK SUPPORT
Some in the markets drew support from views that safety measures put in place at the European Central Bank should contain the fallout from Cyprus. In addition, three of the world's biggest central banks are expected to signal this week that they plan to keep monetary policy loose for the foreseeable future.
"Clearly this (Cyprus deal) is a negative development for European assets, but in the terms of contagion, we think it is quite limited," said Guillermo Felices, head of euro asset allocation at Barclays in London.
Other analysts noted shares are trading at historically lofty levels and are therefore ripe for a pullback. Efforts by policymakers to revise the Cyprus plan to spare small savers from losses also supported the market.
The euro staged a slight recovery after dropping to a three-month low of $1.2882 in Asian trading. It was down 1 percent overall on the day but was flat for the European session at $1.2950.
The dollar, which investors often seek when tensions in Europe rise, gained 0.5 percent against a basket of currencies.
PERIPHERAL VISION
The euro zone's bond market has been the main lightning rod of its troubles over the last three years.
While Italian and Spanish bond yields jumped, the widespread anxiety drove up German government bonds, the traditional favorite of risk-adverse European investors, and boosted the cost of insuring against a sovereign default in the euro zone's southern rim.
In commodity markets, US crude futures rose 0.3 percent to $93.71 per barrel while Brent crude was down 0.4 percent at $109.41 per barrel.
<Center><b><i>Copyright Reuters, 2013</b></i><br></center>
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