* Euro skids across the board in initial Cyprus reaction
* Yen gaps higher as speculators caught short; USD follows
* Focus on Cyprus parliament vote, peripheral bond yields
By Lisa Twaronite and Wayne Cole
TOKYO/SYDNEY, March 18 The euro plunged and traders squeezed the yen sharply higher on Monday in Asia as news that Cyprus' bailout plan includes taxing depositors was taken as a dangerous precedent that could ultimately trigger bank runs elsewhere in the region.
Euro zone finance ministers want to tap Cyprus' savers in order for the country to receive a 10 billion euro ($13 billion) bailout, and this decision caused a run on cash after its announcement on Saturday morning. Cyprus was working on a last-minute proposal to soften the blow after a parliamentary vote on the measure was postponed until Monday, a government source said.
"There are unclear points about Cyprus, so that's why nobody wants to buy the euro right now, at least in the Tokyo and London session," ahead of the Cyprus vote, said Masashi Murata, a currency strategist at Brown Brothers Harriman in Tokyo.
The common currency was changing hands at $1.2901, down 1.3 percent from Friday's North American level after falling as low as $1.2888 on the EBS trading platform, its lowest since Dec. 10. Support was said to lie at 200-day moving average, now at $1.2872.
The euro last bought 122.34 yen, down 1.9 percent. The 55-day moving average provided support during the yen's correction at the end of last month and a close below the average, now at 121.69 yen, could herald a deeper correction.
The euro also lost ground on the Swiss franc to 1.2178 francs, from around 1.2275.
The yen shot higher across the board as speculative sellers were caught badly short of the currency, and had to quickly unwind carry trade positions.
Borrowing in yen to buy higher yielding assets has been a heavily-favoured trade in recent weeks on expectations of more aggressive easing steps from the Bank of Japan.
Japan's parliament on Friday formally approved Haruhiko Kuroda as the next BOJ governor as well as Kikuo Iwata and Hiroshi Nakaso as his deputies, putting in place the leadership to aggressively pursue its 2 percent inflation target.
An improving U.S. economy has also underpinned the greenback in recent weeks. Data on Friday continued to show growth in U.S. manufacturing, though U.S. consumer sentiment weakened to its lowest in over a year and inflation picked up.
"The U.S. economy remains solid," Brown Brothers Harriman's Murata said. "I don't think dollar-yen will drop a lot, below 93 or 92 yen, and will probably gradually show a recovery today,"
The dollar fell back to 94.80 yen, from 95.38 yen late on Friday. It dropped to 93.45 yen, its lowest since March 6, moving away from a 3-1/2-year peak of 96.71 struck on March 12.
The Australian dollar lost almost two full yen to a low of 97.74 yen, its lowest since March 8, in volatile early trading before steadying at 98.06.
The U.S. dollar was up 0.7 percent against a basket of currencies at 82.792.
Euro zone leaders and Cyprus agreed on Saturday that depositors should be taxed up to 10 percent - 6.7 percent on amounts below 100,000 euros and 9.9 percent on figures above that - to raise 5.8 billion euros so the island country could be eligible for an international bailout.
Cyprus was discussing with lenders the possibility of changing the levy to 3.0 percent for deposits below 100,000 euros, and to 12.5 percent for those above that, the source said.
Taxing depositors would be a radical change from usual practice, and would give depositors in other debt-ridden countries an incentive to shift their money to banks in EU countries with lower financial system risks, such as Germany.
Some strategists expected limited fallout from the move in the longer term, but nonetheless recognised it as a clear short-term signal to sell the euro.
"The news on Cyprus may well elicit some negative euro reaction on the back of fears of capital flight from peripheral Europe, although if managed properly, it shouldn't spark the start of a contagious bank run," said Brian Martin, a senior strategist at ANZ in London.
"We do not think this will cause a sustained run on bank deposits in the euro area, as Cyprus appears a special case."
Still, for the moment he recommended selling the euro against the Swiss franc, yen and sterling, and selling bonds from EU periphery countries.
He noted one early sign that the Cyprus deal was causing contagion would be a widening in peripheral bond spreads.