Risk assets fell across the board on Monday as Asian markets saw a massive sell-off after a weekend decision by the euro zone to force depositors in Cyprus to contribute towards a bailout sparked concerns of contagion across other peripheral countries.
The Hang Seng Index and Japan's Nikkei led losses by over 2 percent, Australia's benchmark declined to a two-week low and Seoul's Kospi hit a fresh one-month low. Meanwhile, Shanghai shares traded at their weakest levels in two months and the Hong Kong market erased all its gains for 2013.
The euro zone's decision to implement a levy on bank deposits of all sizes in return for financial aid marks a radical departure from previous euro zone aid packages. "It (the levy) could be seen as akin to the Fed deciding not to stand behind Lehman Brothers in 2008," said Jason Hughes of IG Markets in a note.
The unusual bailout proposal rattled currency and commodity markets with Brent crude dropping over $1 in Asian trade, the tumbling to an all-time low for 2013 and the yen briefly hitting a one-week high against the U.S dollar.
Investors are concerned that taxing depositors may provoke depositors in other debt-ridden nations to shift their money to "safer" European banks. "If I'm an Italian and Spanish depositor, I'd be very, very nervous right now," said Kelvin Tay of UBS Wealth Management on CNBC's "Asia Squawk Box."
Diminishing concerns about Europe's sovereign debt crisis have largely underpinned much of Asia's stock market gains in 2013 and investors are wondering if the Cyprus bailout deal could spark a fresh risk-off trade.
The case for a correction is clearer with stock markets outside of Japan. Many indices have gradually eased from fresh highs this past month. Australia's hit a four-and-a-half year peak on March 12 and Seoul's Kospi hit a two-and-a-half month high on March 6; both indices have gradually retreated ever since.
This down trend may pave the way for a bigger drop in risk appetite caused by a European debt scare, analysts said.
Strong Yen Hurts Nikkei
The pause in the yen's recent decline led to a 2.7 percent fall in Tokyo equities as the benchmark moved further away from Friday's four-and-a-half year peak.
The yen has weakened over 10 percent since the start of 2013 on hopes of bold fiscal stimulus policies under Prime Minister Shinzo Abe's new leadership, which has in turn sparked an increase of nearly 30 percent for the Nikkei.
If uncertainties over Europe continue, investors may continue flocking to the safe-haven yen, which would limit further stock market gains and further increase the necessity of aggressive easing measures at April's Bank of Japan policy review.
China Property Fears
In Greater China, domestic factors were the main cause of losses rather than news of Cyprus's bank deposit levy. Data released early Monday showed China's new home prices rose in February for a second consecutive month, leading to profit-taking amid property counters.
Hong Kong-listed developers like China Overseas Land fell 2 percent, dragging Hong Kong shares below the 22,100-mark to hit a fresh low for 2013.
(Read More: Asian Stocks to Jump Up to 20% on Earnings Growth: HSBC)
Financials were amid the worst hit sector in the mainland, dragging the Shanghai Composite down to a fresh two-month low. China Pacific Life Insurance and New China Life Insurance slipped over 4.5 percent after China's home price data release.
In Sydney, resource stocks were under pressure after spot iron ore prices and copper fell to multi-month lows thanks to sapping Chinese demand. Sundance Resources dove over 8 percent while the world's top miners BHP Billiton and Rio Tinto lost over 2 percent.
Seoul's benchmark traded at its lowest levels in over a month as market heavyweight Samsung Electronics dragged the index down with a 2.3 percent fall. The tech giant extended Friday's 2.6 percent loss after the launch of its new Galaxy smartphone.
Coming Up This Week:
TUESDAY: Minutes from the Reserve Bank of Australia, U.S. Treasury Secretary Jack Lew visits Beijing, Earnings from Hutch Telecom, Acer. Rerserve Bank of India meets, U.S Federal Open Market Committee begins two-day meeting.
WEDNESDAY: Earnings from Geely Auto, Tencent, China Telecom, Petrochina. Taiwan February exports, Malaysia February consumer price inflation.
THURSDAY: China March HSBC flash PMI. Earnings from Li & Fung, China Unicom, China State Construction, Cosco International, Hong Kong February consumer price inflation.
FRIDAY: Earnings from BYD, CNOOC, CCB, Sinopec.