 "Cyprus deal shock sends European shares tumbling")
The euro zone struck a deal on Saturday to hand Cyprus a bailout worth 10 billion euros, but defied warnings - including from the European Central Bank - and imposed a levy that will see those with cash in the island's banks lose between 6.75 and 9.9 percent of their money.
Parliament in Cyprus was due to vote on the measure later on Monday and the government was looking at ways to reduce the impact on small savers.
Without the rescue Cyprus would have be unable to avoid a default. That would have undermined the promise that Greece's writedown last year was a one-off, but the unprecedented move to hit depositors adds a radical new dimension to the crisis.
The response of investors was unambiguous as European markets re-opened for first time since the deal was announced.
Stock markets across the region lurched lower, the euro fell to a three-month low, while safe-haven assets such as goldand German government bonds jumped.
Economists were taken aback by the move but some took the view that safety measures in place at the ECB should contain the fallout.
"Clearly this 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.
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"There are tools such as the ECB's OMT (bond buying programme) and the option of more 3-year LTRO's that can provide liquidity if needed, that the market will feel comfortable about when assessing the longer-term implications."
Equity markets were underscoring the more immediate worries, however and ay 0810 GMT the pan-European FTSEurofirst 300 was down 1.2 percent after Asia indexes had also slumped.
London's FTSE 100, Frankfurt's DAX and Paris's CAC-40 were down 1.4, 1.6 and 2 % respectively as traders' screens showed a sea of red.
The ECB's pledge to buy euro zone government bonds in unlimited amounts if needed has calmed the beleaguered currency bloc. But if investors fear the Cypriot template could be repeated in any future rescues, that calm could be shattered.
In the currency market, the euro was down more than 1 % at $1.2941 versus the dollar, having dropped as low as $1.2882 in the Asian session. The dollar , which investors often head for when tensions in Europe rise, rose 0.6 %.
Italian and Spanish bonds also dropped sharply in a frenzied opening spell of trading. The two countries remain the central concern of the euro zone's crisis due to the size of their economies which some economists warn would be too big to rescue.
The widespread anxiety drove German government bonds, the traditional favourite of risk-adverse European investors, higher. Bund futures were up 80 ticks at 144.16, while
Gold, another safe-haven asset, saw its biggest rise in a month as it jumped over 1 percent to $1,604 an ounce.
Meanwhile Crude and Brent oil both tumbled 1.1 % to $92.46 a barrel and to $108.62 respectively.
"It's a Cyprus shock. The euro fell, and crude followed that lower," said Ken Hasegawa, a commodity sales manager at Newedge in Tokyo. "We don't know what's going to happen, and it's becoming an uncertain factor."