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Stocks End Lower on Cyprus Fears, Dragged by Banks; Vix Spikes 20%

Stocks closed in the red Monday, with the S&P 500 moving further away from its all-time high, amid worries over the bailout news in Cyprus and over fears the euro zone's bigger troubled economies such as Spain and Italy may follow suit.

(Read More: After-Hours Buzz: EA, BAC & More)

"In the short-run, it does raise a lot of nerves because the last thing you need in Europe is to see a decline in confidence," said Anthony Chan, chief economist at JPMorgan's Chase Private Client Business. "The good news is, they're working towards making this a little bit more palatable, perhaps lowering the amount that they ask for from the insured depositors or eliminating that and just focusing on the uninsured depositors, which I think would be a step in the right direction."

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The Dow Jones Industrial Average slumped 62.05 points, or 0.43 percent, to end at 14,452.06. closing lower for the second-straight session, dragged by Boeing and Disney. Still, the blue-chip index remains on track for its best quarterly percentage gain since the fourth quarter of 2011.

The S&P 500 fell 8.60 points, or 0.55 percent, to close at 1,552.10. The Nasdaq declined 11.48 points, or 0.35 percent, to finish at 3,237.59.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, spiked nearly 20 percent to finish near 14.

Most key S&P sectors closed in negative territory, led by financials and energy.

Global markets were spooked by news of Cyprus' plan to tax bank depositors to help fund a 10 billion euro bailout from the European Commission, the European Central Bank and the International Monetary Fund.This marks the first time depositors have been asked to contribute to a financial-rescue plan during the long-running euro-zone debt crisis.

Banks in Cyprus will remain closed until Thursday pending a decision by parliament to approve a levy on bank depositors.

(Read More: How Tiny Cyprus Could Still Have Big Market Impact)

"The difference between today's news from Cyprus and what this news might have meant a year ago is the Mario Draghi put, which means that the European Central Bank will probably step in in case of some sort of systemic risk," said Michael Sheldon, chief market strategist at RDM Financial. "It's going to be hard to really dent the recent uptrend in stock prices we've seen over the last few months without a significant piece of news."

The euro plunged to a three-month low against the U.S. greenback and a roughly two-week trough versus the yen.

All major banks were sharply lower across the board, including Credit Suisse and Morgan Stanley.

(Read More: What You Need to Know About Cyprus: El-Erian)

"Don't look for a catalyst or a news event to be the tipping point for a meaningful pullback or correction," wrote Elliot Spar, market strategist at Stifel Nicolaus. "I continue to believe it will come from the technical side in the form of an increasing number of negative divergences, an increasing number of consecutive days of lagging NYSE breadth or a key reversal day in the major averages."

On the economic front, the homebuilder sentiment index declined to 44 in March from 46 in the month prior, according to the National Association of Home Builders, falling to the lowest level in five months. Economists polled by Reuters expected a gain to 47. A reading below 50 indicates more builders view market conditions as poor than favorable.

Shares of homebuilders including Ryland and Beazer fell following the report.

The Federal Reserve is scheduled to hold a two-day meeting later this week and investors will be watching for any signs that the central bank could start winding down its quantitative easing program. The Fed's meeting will culminate with the release of its policy statement, economic forecasts and a press briefing by Fed Chairman Ben Bernanke on Wednesday afternoon.

(Read More: Super Wednesday for World's Central Banks)

JCPenney surged to lead the S&P 500 gainers after ISI Group said the retailer has the to move to a REIT-like entity, saying the company's top 300 stores could generate approximately $1.2 billion in sublet income providing a valuation of nearly $40 a share.

Schlumberger tumbled after the oilfield services company warned that North American activity was coming in lower than expected in the first quarter, as fewer rigs were going back to work than it had expected.

Verizon gained after the company was upgraded to "buy" from "neutral" at Citigroup, which now sees the telecommunications firm executing a buyout of Vodafone's stake in Verizon Wireless that provides tax efficiency for Vodafone and earnings accretion for Verizon.

Hewlett-Packard rallied to lead the Dow gainers after Morgan Stanley upgraded the tech firm to "overweight" from "equal weight," citing positive momentum in both free cash flow and earnings, which will accelerate the timing of cash being returned to investors.

—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)

Coming Up This Week:

TUESDAY: Housing starts, FOMC mtg begins, Obama travels to Israel, Hostess hearing; Earnings from DSW, Adobe Systems, Cintas, William-Sonoma, Francesca Holdings
WEDNESDAY: Mortgage applications, oil inventories, FOMC mtg announcement, Fed forecasts, Bernanke press conference, Hewlett-Packard shraeholders mtg; Earnings from FedEx, General Mills, Lennar, Oracle, Jabil Circuit, Guess
THURSDAY: Jobless claims, PMI manufacturing index flash, FHFA home price index, existing hom esales, Philadelphia Fed survey, leading indicators, natural gas inventories, Fed balance sheet/money supply; Earnings from Lululemon Athletica, Ross Stores, KBHome, Nike, Micron,
FRIDAY: Fed Governor Raskin speaks, Blackberry Z10 on sale via AT&T; Earnings from Darden Restaurants, Tiffany

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