)
Adding to the negative tone was the latest restrictive move by China, with its banking watchdog ordering banks to strengthen checks on the underlying assets of a range of wealth management products to ward off potential risks to the financial system.
Japan's Nikkei stock average tumbled 1.6%, as euro zone worries prompted profit taking in exporters and financials.
The MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.6%, wiping out the previous day's gains, which had taken the index to a one-week high. The financial sector led the decline with a 0.8% drop.
"Multiple factors are denting sentiment, with uncertainties over the future of Cyprus despite the bailout, Italian political instability and bad economic indicators from the euro zone," said Hirokazu Yuihama, a senior strategist at Daiwa Securities in Tokyo.
Despite their recent retracement, Asian shares outside of Japan have generally stayed in a range for the first three months of 2013, holding near the upper end close to their highest levels since August 2011, as improving US economic growth and hopes China will stay on a recovery track helped boost investors' risk appetite.
"China's move to tighten property regulations has been the biggest drag for Asia. Looking ahead, whether China can keep recovering will be the main issue specific to this region," Yuihama said, adding that Southeast Asian markets may be exposed to the biggest adjustments if negative news spurred broader selling.
Chinese shares were by far the worst regional performer on Thursday, with Hong Kong shares sliding 1.1% and Shanghai shares slumping 2.5%.
"The tightening of WMP (wealth management product) regulations is in line with our expectations, but the timing is a little earlier than we had expected (we were expecting mid-2013)," May Yan, Barclays' top-rated Chinese banking analyst, said in a note to clients.
Trading was expected to slow ahead of the Easter holidays.
"Whatever is happening in Europe in terms of Cyprus and the ramifications of that, maybe a lot of traders just don't want to be long or don't want to have positions over this long weekend," said Winston Sammut, investment director at Maxim Asset Management.
Euro Vulnerable
Cypriots are expected to besiege lenders in the morning as banks reopen for the first time in almost two weeks.
Authorities imposed restrictions on cash withdrawals and may curb the use of credit cards abroad to keep a rein on money flows after the country agreed to a bailout deal that will wipe out some senior bank bondholders and impose losses on large depositors.
In Italy, the government's cost of borrowing over five years rose to its highest since October at an auction on Wednesday, reflecting investor wariness over a lack of progress in forming a new government and worries about Cyprus's bailout. Italy's interest cost on new 10-year debt fell, however.
Meanwhile, data on Wednesday showed confidence in the euro zone economy fell more than expected in March after four straight months of gains, with other reports pointing to a slump in Italian manufacturing and retail sales and shrinking gross domestic product in France in the final quarter of 2012.
"Headline risks for the euro should persist, although a positive turn of events in either country would probably come as a greater surprise given the market's subdued expectations," said Vassili Serebriakov, strategist at BNP Paribas.
The euro was at $1.2787, hovering near a four-month low of $1.2750 touched on Wednesday, and fell 0.3% against the yen at 120.23, after hitting a one-month low of 119.945 the day before.
The dollar was down 0.1% but still near Wednesday's 7-1/2-month peak of 83.302 against a basket of major currencies
Fears about the euro zone boosted safe-haven assets, pushing benchmark 10-year US Treasuries yields further down by a couple of basis points to a two-month low around 1.83% in Asia.
Spot gold held above $1,600 an ounce.
The 10-year Japanese government bond yield fell to 0.510%, its lowest level since June 2003, on expectations for strong stimulus measures will be announced by the Bank of Japan next week at its first policy meeting under new leadership.
Such anticipations drove the BOJ's benchmark interest rate down on Wednesday to 0.059%, the lowest since July 13, 2006, which was one day before the central bank ended its policy to keep the overnight call rate effectively at zero percent.
Both US crude futures and Brent were steady, trading around $96.61 a barrel and $109.68, respectively.
