The move hit confidence in the European banking sector, sparking concerns that the eurozone might go after depositors in other eurozone nations. The euro and bonds of troubled European sovereign debtors also fell.
The declines gave US 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 €10bn, but defied warnings — including from the ECB — and imposed a levy that would cost those with cash in the island’s banks between 6.75% and 9.9% of their money.
“The worry is really about the possibility of contagion to other European countries. Financials are lower here (in the US) as well also because of the worry that ‘could it also happen here?’ which I don’t think is the case,” said Joe Bell, senior equity analyst at Schaeffer’s Investment Research.
The move to hit depositors takes the eurozone 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 0.2% lower, having at one point been down as much as 1.4%. London’s FTSE 100, Frankfurt’s DAX and Paris’s CAC-40 were down 0.3%, 0.3% and 0.4% respectively, leaving MSCI’s global share index down 0.77%.
The euro staged a slight recovery after dropping to a three-month low of $1.2882 in Asian trading. It was down 1% overall on the day but was flat for the European session at $1.2950.