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Asian markets were mixed in nervous trade Friday after the European Central Bank warned Cyprus it would cut off funding to its banks if leaders did not hammer out a new bailout deal by next week.
Regional markets followed losses in Europe and on Wall Street as Nicosia struggles to find new ways to raise cash to qualify for bailout funds, after its plan to tax savings was overwhelmingly rejected on Tuesday.
Tokyo fell 1.50 percent by the break as traders moved back into the safe-haven yen, mainly at the expense of the euro, while Hong Kong lost 0.22 percent, although Sydney gained 0.36 percent, Shanghai added 0.21 percent and Seoul was 0.14 percent higher.
Cypriot politicians have until Monday to approve a "Plan B" bailout deal with the European Union and International Monetary Fund or face being choked from ECB funds, which would likely cause the island's banks to collapse.
Adding to pressure, an EU source said that unless Nicosia pushed a workable plan through parliament and restructured its banking sector by Tuesday it risked expulsion from the eurozone.
Global markets have this week largely been driven by the crisis in Cyprus after the government at the weekend unveiled a plan to tax deposits up to 10 percent as part of a deal to qualify for a EU/IMF $13 billion bailout.
The proposal met global consternation, with markets diving. Despite a revised plan that eased the burden on poorer people, lawmakers threw it out, leaving the island desperate for cash to pay its huge debts.
However, Macquarie Private Wealth division director Martin Lakos told Dow Jones Newswires: "Cyprus has reminded investors of European risks, but I don't think Cyprus itself is a big risk for the market.
"The market was due for a pullback despite pretty good US economic data in recent months, but it's still very much a buy-the-dips environment."
The events in Cyprus have, however, halted a months-long rally in the euro and the dollar against the yen.
In Tokyo Friday the dollar fetched 94.92 yen and the euro 122.55 yen, compared with 95.01 yen and 122.58 yen in New York late Thursday. That compares with 95.84 yen and 123.90 yen Thursday in Asia.
The euro was also at $1.2911, compared with $1.2902 in New York. The single currency was at $1.2923 earlier Thursday.
Adding to pessimism in Europe was data showing further weakness in manufacturing.
The eurozone Purchasing Managers' Index published by London-based Markit showed the German economy was starting to be affected by the problems in the rest of the region while the French slowdown is accelerating.
Overall the eurozone PMI, a leading indicator of growth, fell to a four-month low of 46.5 points in March against 47.9 in February.
A figure above 50 indicates growth while anything below points to contraction.
On Wall Street the Dow fell 0.62 percent, the S&P 500 dropped 0.83 percent and the Nasdaq gave up 0.97 percent.
Oil prices were mixed, with New York's main contract, light sweet crude for delivery in May adding 16 cents to $92.61 a barrel and Brent North Sea crude for May shedding 14 cents to $107.33.
Gold was at $1,614.50 an ounce at 0310 GMT compared with $1,608.40 late Thursday.