European shares extend losses as Cyprus worries weigh

Cyprus's parliament is unlikely to pass legislation taxing deposits which has prompted the flurry in its banking system

The euro and European shares fell for a second day on Tuesday as investors worried about the uncertainty over a bailout for Cyprus aimed at preventing a debt default and banking collapse.

A government spokesman said Cyprus's parliament was likely to reject plans agreed by euro zone officials over the weekend to part-fund a 10 billion euro rescue of the island with a tax of between 6.75 and 9.9 % on bank deposits.

"All eyes will remain on Cyprus. Lots of uncertainty persists and most pressingly you don't seem to have a majority in the parliament even if you do a partial redesign of the deposit levy," said Tobias Blattner at Daiwa Securities.

"Marketwise if you fail to pass the bill it would be catastrophic to a certain extent because, in theory, at that moment you would be looking at a default and you are just not sure what would happen then."

Euro zone ministers have urged Cyprus to let smaller savers escape the levy but if its parliament, which is due to convene at 1600 GMT, cannot agree a deal it would put the bailout in jeopardy and raise the threat of default.

The uncertainty saw the euro drop 0.2 % as it remained near a three-month low and European shares fell 0.4 percent in early trades as they extended Monday's sell-off.

Downbeat car data also weighed on sentiment as figures from Association of European Car Manufacturers showed sales fell more than 10 % last month having hit a 17-year low in January.

This year is shaping up to be another tough slog for manufactures across Europe, as consumers and firms in recessionary economies postpone big ticket purchases.

London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were down between 0.4 and 0.6 % by 0815 GMT, while the concerns surrounding Cyprus meant German government bonds were again in demand as investors looked to traditional safe-haven assets.

The Bund future was last up 25 ticks on the day at 144.18 while Italian and Spanish bonds fell for a second session.

"We are just waiting for another headline out of Cyprus," one trader said, adding that buying Bunds "is the only trade to have on."

"It's quite serious, it's got bigger implications. I think there is (a risk) of some cross border contamination," he added.