Investors spooked by Cyprus bank tax plan THE sharemarket suffered its biggest fall in more than three weeks yesterday and volatility soared as a controversial bank bailout plan in Cyprus threatened to reignite the European sovereign debt crisis. Cyprus proposed a tax on the country's bank depositors to decrease the costs of the bailout -- a tax that if passed by parliament would mark the first time that such a strategy has been implemented during the five-year eurozone crisis. The move may erode savers' confidence across the currency bloc and add to anger over the handling of the crisis. The plan for a "stability levy" of up to 10 per cent on deposits in Cypriot banks was a "hazardous way of funding a bailout, even if it removes the need for the Cypriot government to implement painful spending cuts and tax increases," said Perpetual's head of investment market research, Matthew Sherwood. He said the proposed Cypriot deposit tax had the potential to start a bank run in Cyprus and bigger eurozone economies, where public finances were already fragile. Australia's S&P/ASX 200 index closed down 2.1 per cent at a two-week low of 5015.4 points. Shares worth $5.6 billion were traded, slightly above the 20-day moving average of $5.4bn, but less than the $6.7bn traded on Friday, when the index rose 1.8 per cent, its biggest rise in eight months. The S&P/ASX 200 VIX, or Volatility Index, surged 28 per cent to its highest point since July last year. It was the biggest jump in the volatility index since December 2011. The falls in shares were broad-based, with banks and miners among the hardest hit. Westpac, National Australia Bank and ANZ fell between 2.2 per cent and 3 per cent, while BHP Billiton, Rio Tinto and Fortescue Metals declined 2.4-3.9 per cent. CSL, AMP and Macquarie fell between 2.5 per cent and 2.9 per cent and Woolworths lost 3.6 per cent, ex-dividend. The declines reflected nervousness in international markets -- S&P 500 futures and the European single currency both declined 1.5 per cent, while in Asia, the Nikkei 225 fell 2.2 per cent, the Shanghai Composite lost 1.2 per cent and Hong Kong fell 2.3 per cent. "It's the first time savers have been hit to bail out a sovereign, so the market will keep an eye on eurozone banks tonight," IG chief market strategist Chris Weston said. I don't think it will cause a new European sovereign crisis, as some have said, but the ECB (European Central Bank) really needs to inspire confidence that this is a one-off. BBY institutional dealer Anson Rosewall said the key for today would be whether European financial stocks reacted negatively to the news on Cyprus. "A sell-off will likely trigger a near-term rise in global and domestic credit spreads that will affect not only offshore financials, but also local bank share prices, which had been positively influenced by falling funding costs of late," he said. It was a concern because local financials make up 42 per cent of the S&P/ASX 200, he said. The dollar edged lower in Asia trade after investors reacted negatively to the Cyprus news. At 5pm AEDT, the dollar was buying $US1.036, down US0.09c. With a potential spanner thrown in the works of the eurozone recovery, risk assets were on the retreat today, with traders awaiting clarification of the longer-term impact this may have.