Cyprus needs to come up with 5.8 billion euros ($7.5 billion) on its own in order to secure 10 billion euros in rescue loans from international creditors. Parliament on Tuesday rejected a proposal to fund part of the bailout by taxing bank deposits.
Since then, officials have been pursuing new bailout strategies, including a possible loan from ally Russia. Nearly a third of the deposits in Cyprus' banks are believed to be owned by Russians.
Britain's FTSE 100 dropped 0.6 percent to 6,396.06. Germany's DAX fell 0.7 percent to 7,945.85. France's CAC-40 tumbled 1 percent to 3,790.83. Wall Street also appeared headed for losses. Dow Jones industrial futures shed 0.1 percent to 14,391 while S&P 500 futures lost 0.2 percent at 1,546.30.
If Cyprus doesn't work out a way to get the money it needs, the banks could fail and fuel financial chaos that could eventually cause the country to leave the euro. That's a scenario European policymakers are fighting to avoid for fear that an exit by one may spell the eventual end of the currency union.
"We expect a new agreement on Cyprus' bailout to be reached eventually but the longer the negotiations last the bigger the funding risk for the banks, including in other peripheral countries," said analysts at Credit Agricole CIB in Hong Kong.
One positive sign for markets came from a survey showing a better-than-expected manufacturing performance by China in March. HSBC's preliminary purchasing managers' index rose to 51.7 from 50.4 in February on a 100-point scale. Analysts were expecting a reading of 50.8.
Stocks were mixed in Asia. Japan's Nikkei 225 index surged 1.3 percent to 12,635.69, its highest close since September 2008.
Benchmarks in Singapore and Taiwan also rose. South Korea's Kospi slipped 0.4 percent to 1,950.82. Australia's S&P/ASX 200 shed 0.2 percent to 4,959.40.
Hong Kong's Hang Seng swung between gains and losses before settling 0.1 percent down at 22,225.88. Analysts attributed the drop to an apparent sell-off prompted by skepticism about market levels in mainland China the day before.
The Shanghai and Shenzhen composite indexes soared 2.8 percent and 2.7 percent respectively Wednesday. Thursday's advance among mainland shares was more modest. The Shanghai Composite Index rose 0.3 percent to2,324.24. The Shenzhen Composite Index rose 0.9 percent to 958.39.
Francis Lun, managing director of Lyncean Holdings in Hong Kong, said the large gains were fueled by rumors from speculators that China's social security fund was preparing to put 100 billion yuan ($15.9 billion) into equity markets.
"Speculators are making up these stories so they can make money from the market. Today they are taking profits," Lun said. "For the past six months, all these rumors proved to be false."
Benchmark oil for May delivery was down 48 cents to $93.02 per barrel in electronic trading on the New York Mercantile Exchange. The contract for April rose 80 cents to settle at $92.96 on the Nymex on Wednesday.
In currencies, the euro fell to $1.2901 from $1.2943 late Wednesday in New York. The dollar fell to 95.74 yen from 95.89 yen.
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