* European shares extend losses as Cyprus worries weigh * Euro falls back towards three-month low * German government bonds rise, periphery bonds dip By Marc Jones LONDON, March 19 (Reuters) - The euro, European shares and oil fell for a second day on Tuesday, with investors unsettled by the risk of failure for a bailout deal aimed at saving Cyprus from default and its banks from collapse. A government spokesman said Cyprus's parliament was likely to reject plans agreed by euro zone officials over the weekend to part-fund a 10 billion euro rescue of the island by seizing between 6.75 and 9.9 percent of deposits in Cypriot banks. "All eyes will remain on Cyprus. Lots of uncertainty persists, and most pressingly you don't seem to have a majority in the parliament even if you do a partial redesign of the deposit levy," said Tobias Blattner at Daiwa Securities. "Marketwise, if you fail to pass the bill it would be catastrophic to a certain extent because, in theory, at that moment you would be looking at a default, and you are just not sure what would happen then." Euro zone ministers have urged Cyprus to let smaller savers escape the levy, but if its parliament cannot agree, it would put the bailout in jeopardy and raise the risk of default. A draft bill drawn up by the government in an attempt to quell some of the public anger at the deal included plans to impose the levy only on savings above 20,000 euros rather than on all funds as originally set out. The euro was down 0.1 percent at $1.2946, near a three-month low, and European shares were down 0.4 percent by mid-morning as they extended Monday's measured sell-off. It also overshadowed a pick-up in German sentiment data from the ZEW economic think-tank, though the figures also came with a warning that Cyprus and the political stalemate in Italy had raised the risk of the crisis worsening again. BUND BOUNCE Downbeat car data also weighed on sentiment as figures from the Association of European Car Manufacturers showed sales fell more than 10 percent last month, having hit a 17-year low in January. This year is shaping up to be another tough slog for manufacturers across Europe, as consumers and firms in recessionary economies postpone big ticket purchases. London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were down 0.2, 0.4 and 0.8 percent, respectively, by 1130 GMT, while the concerns surrounding Cyprus meant safe-haven German government bonds were again in demand. The plan to seize deposits in Cyprus has shredded confidence in the 100,000 euro ($129,600) guarantee on savings offered across the European Union and raised fears of bank runs in other debt-strained countries if savers there worry it could happen to them. The Bund future built gains steadily through the morning before the solid ZEW data tempered some of the demand to leave it up 30 ticks on the day at 144.24. "We are just waiting for another headline out of Cyprus," one trader said, adding that buying Bunds "is the only trade to have on". "It's quite serious. It's got bigger implications. I think there is (a risk) of some cross-border contamination," he added. ECB BACKSTOP But while Cyprus's problems are threatening to disrupt the calm brought to the bloc over the last eight months by the European Central Bank's promise to protect troubled countries, it is that guarantee that has kept the market reaction muted. With stock markets in many parts of the world at or near long-term highs, analysts are taking the drops of the past few sessions in their stride. And with the exception of German government bonds, the knee-jerk flight to safety seen on Monday was showing signs of subsiding. The cost of insuring the debt of southern euro zone countries against a default via credit default swaps was virtually unchanged as midday approached, and the dollar was steady against a basket of major currencies after Monday's rise. In Asian trading, Japanese stocks had jumped 2 percent, and the recovery in general risk sentiment supported Asian credit markets, narrowing the spread on the iTraxx Asia ex-Japan investment-grade index by five basis points. Gold, one of the main beneficiaries of Monday's broader market sell-off, also steadied as it eased back from a three-week high to $1,602.31 an ounce. Oil remained sensitive to the jitters, however, to drop below $109 a barrel. If the situation in the euro zone does deteriorate again, analysts warn it could affect the health of the global economy. "The situation in Cyprus, although small, goes to show that the problems in the EU are far from over, and it will exacerbate the declining demand within EU, keeping a lid on oil prices, if not pushing them down," said Natixis analyst Abhishek Deshpande in London. "If a deal is reached, we should see oil prices rise slightly or even remain unchanged ... but if there is no deal, then the chances of Cyprus leaving the EU still could be high, and we could potentially see prices slide back further," he added.