Cyprus banks will stay closed until Thursday
Last Updated at 03:55 GMT
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Banks in Cyprus will remain closed until at least Thursday while talks continue over controversial plans to put a levy on savers' deposits.
The news that bank accounts face a one-off tax to help fund the country's bailout saw depositors rush to cash machines, which soon ran out of funds.
Politicians want to finalise the bailout terms before banks re-open, as fears mount of a bank run.
Plans for a levy unnerved investors, sending shares and the euro lower.
Cyprus's banks were closed on Monday for a Bank Holiday, and the country's central bank said they would now remain shut until Thursday at least.
On Saturday, the government, the European Union and International Monetary Fund agreed an outline deal for a levy on bank deposits in return for a bailout worth 10bn euros ($13bn; £8.6bn).
The move sparked protests in Cyprus, and criticism from Russia, many of whose nationals hold large bank deposits on the island.
Politicians in Cyprus are continuing talks in a bid to agree final details of levy, and there are reports that eurozone finance ministers are due to hold a teleconference later on Monday to review the bailout terms.
News that Cyprus is to tax savers' money to help fund the bailout unsettled investors. The Spanish and Italian stock markets were down 2%, with bank shares the hardest hit.
The euro lost 1% against both the pound and the dollar, leaving it at 85.6p and $1.295 respectively.
Earlier, Japan's Nikkei 225 index fell 2.7%, while Hong Kong's Hang Seng and Australia's ASX 200 dipped 2%.
Many major banks in Italy, France and Spain, some of the eurozone's most indebted countries, were down between 4% and 5%.
In France, Credit Agricole and Societe Generale were the worst affected, losing about 4.5%, while Spain's BBVA lost a similar amount.
In Germany, Deutsche Bank was down 3%, while Commerzbank was 1.3% lower.
Some investors think the Cyprus plan could prompt depositors elsewhere, particularly in Greece, Portugal, Ireland, Italy, Greece and Spain, to withdraw their funds.
"The unprecedented move is an extreme measure and in our view, it will spread some panic... we cannot rule out some capital outflows," said Annalisa Piazza of Newedge Strategy.
But most investors thought the falls would not last long.
Kevin Lilley, European equities fund manager at Old Mutual Asset Management, said he was sitting tight: "I am not doing anything about it. My initial thoughts are that this is a circumstance that is peculiar to Cyprus."
He added that if he had surplus cash, he would probably be taking advantage of the price falls and buying.
A number of other leading fund managers said they, too, were not changing their investment strategy.
David Cumming of Standard Life told BBC News he thought the wider impact would be limited. "I don't think it will have a lasting impact, I think it's an excuse for a correction after a strong run-up."
He said people trusted the EU's mechanisms for maintaining stability in the eurozone: "I don't see a destabilisation of bank deposits across Europe. I don't see any impact for more than a few days in the market."
The European Central Bank board member, Joerg Asmussen, also said he did not think Cyprus's problems would spread to other eurozone countries: "I do believe that the situation of Cyprus and the Cypriot banking sector is indeed unique."
The movement in major government bond yields - the implied interest rate that countries pay to borrow money - was small - an indication that bond investors saw limited risks at the moment.
Cyprus was hardest hit, with its seven-year bond yield jumping by more than 1.5 percentage points to just over 10%.
Italian and Spanish government bond yields rose by far less - and after rising by more than 0.1 percentage points, 10-year yields for Italy were at 4.65%, while Spanish 10-year yields were at 4.9%.
Some see it as undermining the credibility of European authorities who, in other bailouts, such as in Spain, have demanded that it is the large financial institutions that lent money to the governments and banks which should incur losses when things go wrong, not depositors.
In addition, "the Cyprus package highlights the increasing reluctance of countries like Germany, Finland and the Netherlands to support weaker eurozone members", said Satyajit Das, an author and former banker.
This is the first time the 17-nation eurozone has seen a country dip into people's savings to finance a bailout.
Under the one-off levy, bank customers with less than 100,000 euros would have to pay 6.75%, while those with more than 100,000 euros would pay 9.9%.
Depositors in Cypriot banks outside the country, including in Greece, are unaffected by the levy.
But the plan is yet to be finalised and Cyprus's leaders have said they want to ensure protection for small investors.
Meanwhile, an emergency session of the Cypriot parliament has been postponed until Tuesday.
Also, Germany must approve the plan, but is not due to vote until next month.
Following eurozone finance ministers' negotiations last week, Cyprus became the fifth euro-area country to get a bailout to save its banks, which suffered significant losses because of their exposure to Greek debt.