The EU and IMF want all bank customers in Cyprus to pay a levy in return for a bailout worth 10 billion euros.
It has caused widespread panic, with fears mounting that the situation could trigger an escalation of the eurozone debt crisis and a selloff in the euro.
The benchmark Nikkei 225 index was down 340.32 points at 12,220.63, while the Topix index of all first-section issues shed 23.31 points.
As a condition for Cyprus's much-needed bailout, the EU and IMF on Saturday imposed a levy on all deposits in the island's banks.
Deposits of more than 100,000 euros will be hit with a 9.9 percent charge and 6.75 percent for anything below that threshold.
The plan is yet to be finalised but the news of the deal caused a rush to the cash machines in Cyprus as people tried to withdraw money.
Hong Kong's Hang Seng and Australia's ASX 200 meanwhile dipped two percent.
Image: © Getty
Copyright is owned by Asia Outlook and/or Outlook Publishing. All rights reserved.