End of quarter positioning by big investors compounded the "risk off" move, and the euro called the tune for all risk, after tumbling to levels not seen since November. It broke 1.288, the 200-day moving average and fell to 1.275. Curry said the next level for the euro could be all the way to 1.266, its November low.
Besides the unsettling bailout of Cyprus, investors were worried about Italy, where the ability to form a new government looked even more uncertain. Pier Luigi Bersani, leader of the center-left coalition that narrowly won a plurality of the vote, sent a chill through markets when he basically ruled out the formation of a grand coalition government. Italy's $8.8 billion bond auction Wednesday was weak and yields on peripheral sovereign debt zipped higher. Spanish 10-year yields rose above five percent.
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"There's been an attempt to divorce what's happening in Europe with the better fundamentals in the U.S.," said George Goncalves, Treasury strategist at Nomuras America. "If you get enough skittishness going into the quarter end and the beginning of April, it could be the start of a risk off trade. It's a function of technicals. You have these big quarterly moves. The index players will rebalance."
Goncalves said investors are also worried about the fact markets are closed for Good Friday, and there is a long weekend ahead where European headlines could pose risk. "We're seeing asset allocation, short covering and the flight to quality from Europe driving yields under 1.85," he said. Yields on the 10-year were at 1.84 percent, off an overnight high of 1.92 percent.
(Read More: Why Italy Could Be the Next 'Bad Boy of Europe')
Some traders had been expecting an end of quarter trade that would see asset allocators shift more funds into Treasurys, to rebalance portfolios, after equities' big quarterly gain.
The euro has been holding above 1.28 despite all the bad news from Cyprus, which in turn for a 10 billion euro bailout is shutting a main bank, and downsizing another. The government will also be extracting funds from the banks' biggest customers, with uninsured deposits exceeding 100,000 euros.
"I think we're setting up for a pretty decent turn here. I just thought it would be after (S&P) 1,576/1,600. There's potential for that to happen, but the window for that is drawing to a close," Curry said.
Traders have been debating whether the stock market, which is up about nine percent for the quarter, is set to correct. Many strategists have been expecting a pullback; some believe it will be shallow but others say it could be as steep as 10 percent.
Dan Greenberg, chief global strategist at BTIG, has been expecting the market to sell off before moving higher, and Cyprus and other European headlines may just be the excuse. "If the market is at 1,500 to 1,525 by May, I wouldn't be surprised.
"For me, the most important indicator is how far away we were from the 200-day moving average. Before today, we were nine percent away from the 200-day moving average. That's pretty far adrift. That tends to correlate with pauses at best, and pull backs at worst," he said.
Gold was a beneficiary of the risk off move, and June gold jumped as investors rushed into the security of the yellow metal.
"We are also finished with the April month, due to Friday being a holiday," said George Gero of RBC. "First notice day will be tomorrow. If you have an April position you either have to put up full money or make or take delivery. it's a rush to the exit for the April contract. They are rolling it over and buy either June, August or December."
Gero said there's money heading into December because of worries about the euro zone. "Next month is a new week, new quarter and asset allocators may take a second look at gold if the stock market doesn't keep performing," he said.