* European shares tumble although pare initial losses * Euro recovers after drop below $1.29 on Cyprus deal * Spanish and Italian bonds yields jump * Safe haven gold jumps above $1,600 By Marc Jones LONDON, March 18 The euro zone's decision to part-fund a bailout of Cyprus by taxing bank deposits drove down shares, the euro and the bonds of its troubled sovereign debtors on Monday. Hopes that the tactic will not be used elsewhere later helped to contain financial market losses. The bloc struck a deal on Saturday to hand Cyprus rescue loans worth 10 billion euros ($13 billion), but defied warnings - including from the European Central Bank - and imposed a levy that would cost those with cash in the island's banks between 6.75 and 9.9 percent of their money. Parliament in Cyprus put off a vote on the measure - which has shaken depositors' confidence in banks across the continent - until Tuesday, and with public anger at the deal widespread the government said it was looking to reduce the losses for small savers. The deal staved off a default which would have undermined the promise that last year's Greek debt writedown was a one-off, but the move to hit depositors takes the euro zone crisis into unprecedented territory. The initial response of investors was unambiguous. European shares followed Asian indexes to lurch lower, the euro fell to a new three-month low, while safe-haven assets such as gold and German government bonds jumped. Italian and Spanish bond yields both jumped sharply, reflecting fears about the weakness of these two euro zone economies and the size of their debt burdens. European shares had steadied at losses of around 0.6 percent by 1300 GMT, having at one point been down as much as 1.4 percent. Wall Street opened lower but selling was limited. Euro zone bank shares bore the brunt of the sell-off on fears the decision could spark bank runs in other troubled countries. They were down 3.6 percent ahead of the U.S. restart and the cost of insuring the debt of even high-quality European banks against default also rose sharply. "If I were a saver, certainly in Spain or maybe Italy, I think I'd be looking askance at these measures and think this could yet happen to me," Peter Dixon, global financial economist at Commerzbank said. It was the worst session for European equities since last month's inconclusive Italian elections. London's FTSE 100 , Frankfurt's DAX and Paris's CAC-40 were down 0.6, 1 and 1.2 percent respectively, leaving MSCI's global share index down 0.8 percent. CENTRAL BANK SUPPORT However, some in the markets were drawing support from a view that the safety measures put in place at the European Central Bank should contain the fallout. Besides, this week three of the world's biggest central banks are expected to signal they plan to keep monetary policy loose for the foreseeable future. "Clearly this (Cyprus deal) is a negative development for European assets but in the terms of contagion we think it is quite limited," said Guillermo Felices, head euro asset allocation at Barclays in London. "There are tools - such as the ECB's OMT (bond buying programme) and the option of more 3-year LTROs (ECB loans to banks) that can provide liquidity if needed - that the market will feel comfortable about when assessing the longer-term implications." Other analysts said shares are trading at historically lofty levels - and therefore ripe for a pullback. Efforts by policymakers to revise the Cyprus plan to spare small savers from losses also supported the market. The euro staged a slight recovery after dropping to a new three-month low of $1.2882 in Asian trading. It was down 1 percent overall on the day but was flat for the European session at $1.2950. The dollar itself, which investors often head for when tensions in Europe rise, gained 0.5 percent. "Euro zone politicians will be at pains today to manage down the danger of contagion to other markets. The euro will find a little bit of support from that but markets will remain jittery," said Jane Foley, senior currency strategist at Rabobank. PERIPHERIAL VISION The euro zone's bond market has been the main lightening rod of its troubles over the last three-years. While Italian and Spanish bond yields jumped, the widespread anxiety drove up German government bonds, the traditional favourite of risk-adverse European investors, and indiscriminately pushed up the cost of insuring against a sovereign default in the euro zone's southern rim. In commodity markets, U.S. crude and Brent oil both tumbled, with Brent futures $1.70 a barrel lower at $108.16 and U.S. oil declined $1.10 to $92.35. Gold, another safe-haven asset, meanwhile, saw its biggest jump in a month as it rose to $1,608.30, its highest level since late February. "With what is going on in Cyprus right now, investors are looking for some hedges and gold is benefiting from that, but it is questionable how long it will last," Credit Suisse commodity analyst Karim Cherif said.