By Chikako Mogi and Cecile Lefort
TOKYO/SYDNEY (Reuters) - Asian stock and bond markets fell and safe-haven assets such as the yen rose on Monday after a radical bailout plan for Cyprus unnerved investors by re-igniting concerns about the euro zone's weak banks and its fickle policies.
Analysts worried that what appeared to be a knee-jerk reaction might turn into a full-blown sell-off if euro zone officials struggle to implement their plan for Cyprus or fail to convince global markets that the proposal is a one-off deal.
Market participants braced for more uncertainty and volatility as European markets followed Asia lower and U.S. stock futures pointed to a weaker Wall Street open.
Foreigners sold a hefty amount of South Korean shares and exited some of the more popular high-yielding assets in the region, such as Malaysia's ringgit and Indonesian stocks -- assets they had been chasing for weeks to earn better yields.
"While euro zone policymakers have stressed that Cyprus is an exceptional case, that will probably do little to calm sentiments. 'Better safe than sorry' may be the mantra," Mizuho Corporate Bank said in a note.
Cyprus and international lenders agreed at the weekend that savers in the island's outsized banking system would take a hit in return for the offer of 10 billion euros in aid, breaking with previous European Union practice that depositors' savings are sacrosanct and raising fears that it could set a precedent for future euro zone bailouts.
It wasn't just the fear that Cyprus will set a precedent for the rescue of other bigger and weak banking systems, such as Spain's, that unsettled markets.
Uncertainty over how the Cyprus parliament will vote on the bailout, the implementation of the tax on depositors and worries of a run on deposits all contributed to Monday's sell-off in all assets perceived as risky.
Asian shares had their worst single-day drop since late July. The MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.8 percent to its lowest since January 2.
Crude oil tumbled 1.1 percent to $92.46 a barrel. Three-year Australian bond cash yields dropped 16 basis points to 2.95 percent, the biggest daily drop since May last year.
The ringgit weakened to its lowest since August last year while the won touched a five-month low as foreigners sold Korean stocks.
"People are concerned because depositors are being targeted for the first time," said Chris Weston, chief market strategist at IG Markets in Australia.
"It has always been the situation where you protect the depositors over everyone else, but they're breaking a taboo and that could have implications on other nations which have a reasonably weak fiscal position."
Assets perceived as safe havens rallied, with spot gold gaining as much as 1 percent at one point to a three-week high of $1,608.30 an ounce.
"The possibility of this episode leading to a reversal rather than a simple retracement of risk sentiment cannot be discounted," Rabobank said in a client note.
Analysts at Mizuho issued similar words of caution. Cyprus was too small an economy to have an economic knock-on impact on the world, they said.
"Nonetheless, it is more about precedents and implied commitment by euro zone policymakers to be fiscally integrated; apparently that is less than rock-solid," they wrote.
PLAY SAFE
The dollar strengthened 0.7 percent to 82.824 against a basket of major currencies, inching closer to a seven-month high of 83.166 hit last Thursday.
Heading into a U.S. Federal Reserve policy meeting later this week, analysts expect the Cyprus-related anxiety to keep the dollar supported. They also expect the fears will for a while put a floor under the Japanese yen, which very recently was at 3-1/2-year lows against the dollar on expectations of more aggressive monetary easing by the Bank of Japan.
A pause in speculative fund flows into Asia's high-yielding markets such as Indonesia, South Korea and the Philippines would come as a respite for policymakers grappling with the high costs of intervention and the accompanying inflationary pressures.
Market participants also braced for the possibility that renewed concerns over Europe could prompt the Reserve Bank of Australia (RBA) to cut interest rates further, having already slashed rates by 175 basis points since 2011 to offset uncertainties about the global economic outlook.
"Investors thought the situation in Europe was contained, and seemingly it wasn't," said a fixed income trading head at an investment bank in Sydney.
"If the tail risk in Europe becomes explosive, then there will need to be more (rate) cuts," the fixed income trader said. (Additional reporting by Jong Woo Cheon in Singapore; Writing by Vidya Ranganathan; Editing by Kim Coghill)
