Stock markets fall on levy fears

Stock markets have fallen sharply amid fears that an unprecedented levy on bank deposits in Cyprus will plunge Europe back into crisis.

The FTSE 100 Index, which has been trading at a five-year high above 6500 in recent days, slumped 100 points or 1.5%, while Japan's Nikkei ended the session more than 2.5% lower. Banks were among the biggest fallers in London.

Traders are worried that the precedent set by the planned move could spark an exodus of capital from other fragile European economies and jeopardise the region's recent tentative recovery.

Unlike the previous rescues for Greece, Portugal, Ireland, and Spanish banks, the proposed Cypriot bailout is the first one that dips into people's savings to finance a bailout.

In exchange for 10 billion euros (£8.6 billion) in rescue money, there will be a one-time tax of 6.75% on all bank deposits under 100,000 euros (£86,490) and 9.9% over that amount.

The bailout package, which has still to be finalised, involves the International Monetary Fund, European Central Bank and European Union.

Michael Hewson, senior analyst at CMC Markets, said: "If European policymakers were looking for a way to undermine the public trust that underpins the foundation of any banking system, they could not have done a better job."

On Friday, the Dow Jones Industrial Average ended a 10-day winning streak, its longest in nearly 17 years.

Cypriot banks got into trouble after losing some 4.5 billion euros (£3.8bn) on their Greek government bond holdings after eurozone leaders decided to write down Greece's debt last year. President Nicos Anastasiades has urged MPs to approve the tax, saying it is essential to save the country from bankruptcy.

Mr Anastasiades, who assumed the Cypriot presidency on March 1, had rejected any idea of going after deposits to help pay for a bailout during the campaign and after his election.