Asia Falls 2% This Week on Cyprus; China Rallies

Festering concerns of a banking collapse in Cyprus led to a sell-off in most Asian markets on Friday, resulting in a 2 percent weekly loss. However, mainland shares outshone to post a weekly gain of 2 percent after Thursday's Flash PMI data.

A strong yen led the Nikkei to retreat from a four-and-a-half-year peak and Seoul's benchmark closed at a five-week low. Amid gainers, financials led Sydney's S&P ASX 200 to close off session lows and Shanghai shares sat near a one-and-a-half week high.

China's better-than-expected Flash PMI data on Thursday helped mainland shares notch stellar gains this week after the rise in factory activity revealed an economic pick-up in the world's second-largest economy.

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Cyprus has been given a deadline of Monday to put together a plan to raise the 5.8 billion euros it needs to secure a 10 billion euro international bailout. If no deal is in place by then, the European Central Bank will pull the plug on emergency funding to local banks.

(Slideshow: Scenes From the Cyprus Crisis)

"Traders now have to position themselves ahead of the weekend and the prospect of another last-minute deal, akin to Greece's second bailout last year," wrote Jason Hughes of IG Markets in a note.

The crisis comes at a time of deepening economic downturn in Europe after business activity data revealed signs of contraction in Germany and France, the euro zone's leading economies.

Experts tell CNBC that unlike Europe, Asia's macro-economic fundamentals may be strong enough to withstand any spillover effect from Cyprus.

"If you look at the earnings expectations, this is the first season where analyst expectations seem to be broadly in line with the earnings reality. As PMIs move higher, I think we might see another leg-up in the later part of Q2," said Herald Van Der Linde, head of equity strategy, Asia-Pacific at HSBC.

Nikkei Retreats

Gains in the yen snapped the Nikkei's rally as the currency strengthened to 94 per dollar after trading near a three-and-half-year low of 96.7 in the previous session.

As the Cyprus debt crisis keeps markets on edge, investors rushed into the safe-haven yen to cover their bearish positions. The yen has appreciated 1 percent against the dollar since the beginning of the month and any further gains could necessitate radical monetary stimulus.

(Read More: Weak Yen: Why Japan Can't Have Its Cake and Eat It Too )

Expectations for the start of aggressive easing are running high, fueling a 23 percent rally in the Nikkei since the start of 2013.

In his inaugural press briefing on Thursday, Haruhiko Kuroda said bold action was needed to meet the 2 percent inflation target in two years, supporting expectations the central bank will expand stimulus at its next regular policy-setting meeting scheduled for April 3-4.

In Seoul, shares extended a three-day losing streak to close at its lowest levels in five-week despite a weakening in the Korean won.

The currency traded at the 1,119-handle, near a six-month low against the U.S dollar. The decline boosted exporters, with LG Electronics up 1.5 percent.

The index has struggled to push above the 2,000-mark in recent sessions, and came under renewed pressure on Thursday after North Korea's military threatened to attack U.S. navy bases in Guam and Japan.

Hong Kong Earnings

Risk appetite in Hong Kong fell on a dismal picture of corporate earnings.

Foxconn International Holdings, the world's biggest contract maker of cellphones, dropped 1 percent after reporting a net 2012 loss of $316 million, its biggest all-time loss.

Shares of China's largest oil and gas producer, Petrochina declined 1.3 percent on a 13.3 percent drop in net profit, its worth annual results since the global financial crisis.

The Shanghai Composite closed just 3 points shy of a one-and-a-half week high hit earlier in the session.

Financials weighed with China CITIC Bank and China Life Insurance both losing over 1 percent. A surge in capital inflows combined with the People's Bank of China's draining operations in the past month have sparked worries that Beijing will tighten monetary policy in the near- term.

ASX 200 Moves Off Lows

Sydney's benchmark rebounded after touching an earlier six-week low of 4,927 points thanks to a rally amid the gold miners.

OceanaGold rallied 9 percent while Beadell Resources surged 8 percent after bullion traded near a three-and-a-half week high on strong safe haven demand.

Gains were capped by weakness in the construction sector after shares of construction giant Leighton Holdings dived 6.9 percent on the sudden resignation of its chairman and two directors.

Also weighing on shares were worries over the stability of Australia's government after Prime Minister Julia Gillard managed to survive a leadership crisis on Thursday.