By Ryan Vlastelica
NEW YORK (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 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.
The declines gave U.S. equities investors the opportunity to lock in profits after an extended rally last week, but losses were limited as buyers came in after the early selling. Financial shares were among the day's biggest losers.
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.
"The issue ultimately for investors is: 'Is this going to cause contagion?'," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey. European officials "have got to make clear this is Cyprus specific and contain the risk."
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 U.S. 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 <.FTEU3> closed 0.3 percent lower, having at one point been down as much as 1.4 percent. London's FTSE 100 <.FTSE>, Frankfurt's DAX <.GDAXI> and Paris's CAC-40 <.FCHI> were down 0.5 percent, 0.4 percent and 0.5 percent respectively, leaving MSCI's global share index <.MIWD00000PUS> down 0.9 percent.
In the United States, the Dow Jones industrial average <.DJI> was down 25.63 points, or 0.18 percent, at 14,488.48. The Standard & Poor's 500 Index <.SPX> was down 5.79 points, or 0.37 percent, at 1,554.91. The Nasdaq Composite Index <.IXIC> was down 6.97 points, or 0.21 percent, at 3,242.10.
Financial shares were among the weakest, with the S&P financial index <.SPSY> down 0.8 percent, while euro zone bank shares <.SX7E> 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 euro asset allocation at Barclays in London.
Other analysts noted shares are trading at historically lofty levels, and 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 <.DXY>, which investors often seek when tensions in Europe rise, gained 0.4 percent against a basket of currencies.
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.
The benchmark 10-year U.S. Treasury note was up 10/32, the yield at 1.9564 percent.
In commodity markets, U.S. crude futures were flat at $93.46 per barrel while Brent crude was down 0.5 percent at $109.31 per barrel.
(Additional reporting by Rodrigo Campos; Editing by Dan Grebler)