The country's lawmakers are in a race against time to fashion a deal that will also get the blessing of potential creditors from Europe and the International Monetary Fund. The European Central Bank has warned it will end emergency support for Cyprus' banks on Monday if no bailout deal is approved by then.
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. Without the money, it faces bankruptcy and a possible exit from the euro a chain of events that would hit financial markets hard as well as raising renewed questions over the future of Europe's single currency.
"No plan means the failure of Cypriot banks, since the ECB warned that it would cut emergency liquidity lines without one," said David Jones, chief market strategist at IG. "To add to the nightmare scene, queues of Cypriots are forming outside cash machines again. If fear continues to build, then it might not be long before similar lines are seen in Spain and Italy."
In Europe, the FTSE 100 index of leading British shares was down 0.7 percent at 6,387 while Germany's DAX fell 1 percent to 7,924. The CAC-40 in France was 1.6 percent lower at 3,770.
European markets weren't helped by disappointing economic figures for the 17 European Union countries that use the euro. The purchasing managers' index a gauge of business activity fell to 46.5 in March from 47.9 the previous month, indicating the eurozone economy is likely to remain in recession in the first quarter of 2013. A reading below 50 indicates contraction.
The prevailing uncertainty over Cyprus and the bleak economic backdrop weighed on the euro, which was trading 0.2 percent lower at $1.2900 and near its lowest level against the dollar in 2013.
U.S. stocks were also feeling the pressure, with the Dow Jones industrial average down 0.4 percent at 14,456 and the broader S&P 500 index the same rate lower at 1,552. Solid weekly jobless claims and existing home sales figures did little to inspire buying.
Earlier in Asia, Japan's Nikkei 225 index surged 1.3 percent to 12,635.69, its highest close since September 2008. South Korea's Kospi slipped 0.4 percent to 1,950.82 while Hong Kong's Hang Seng ended 0.1 percent down at 22,225.88.
Oil prices drifted lower too with the benchmark New York rate down 73 cents to $92.77 per barrel.