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* Cyprus plans to seize money from bank deposits
* Analysts say move could set worrying precedent
* European bank sector down 2.3 pct, hits lowest in 2 wks
* (Adds analyst, executive comments, details)
By Steve Slater and Lionel Laurent
LONDON/PARIS, March 18 (Reuters) - European bank shares fellmore than 2 percent on Monday as a plan by Cyprus to seize moneyfrom bank deposits raised fears that savers elsewhere may not besafe and the euro zone may be plunged back into crisis.
Analysts said the move by Cyprus could set a worryingprecedent, even though previous bailouts in Greece, Ireland,Spain and Portugal have not imposed losses on small depositors.
"It's no longer taboo to touch deposits," analysts at MorganStanley said, noting savers in other some other countriesoutside the core euro zone economies such as Germany and Francecould be spurred into withdrawing money from local banks.
"Although a bank run seems to be a tail (low) risk, it ispossible that depositors may adjust their investment strategy,reducing their ... deposits and, potentially, transferring theirfunds to core Europe from the peripheral countries," theanalysts said.
Peripheral euro zone countries were in a stronger positionthan when the bloc's crisis flared last year, thanks to ECBliquidity support and banks being more strongly capitalised. Butthe mood remains fragile and one analyst said policymakers were"playing with fire" with the latest move.
The danger is depositors in Portugal or Greece, for example,may fear a levy on savings is now possible if their countriesneed more help.
"The Cyprus proposal is really worrying. It creates aprecedent that means other countries may potentially soakdepositors in the future," said a French bank executive whoasked not to be named.
"If you're a small depositor in Cyprus, you'll tell yourselfthat it would have been better to keep your money under thecarpet than in a bank. And if you're a Greek, a Spaniard or anItalian, well, you'll tell yourself that you might be next.
"It's frankly irresponsible," the executive said.
HARD HIT
By 1030 GMT the STOXX Europe 600 banking index wasdown 2.3 percent at 170.4 points, its lowest for two weeks.
Banks in Spain and Italy were hard hit, with Unicredit down 5.2 percent and Intesa Sanpaolo,Santander and BBVA all down about 4 percent.
France's BNP Paribas and SocGen, as wellas Britain's Barclays, lost more than 4 percent.
Cyprus said over the weekend it would force depositors totake a loss as part of a 10 billion euro ($13 billion) bailout.Ministers rushed on Monday to revise the plan, softening itsimpact on smaller savers, to ensure it would be approved.
The spillover from Cyprus could be limited due to specialcircumstances for the Mediterranean island, including the largesize of its bank sector relative to its economy, analysts said.
Its bailout has also repeatedly been delayed amid concernsfrom other EU states that its close business relations withRussia, and a banking system flush with Russian cash, made it aconduit for money-laundering.
But the move still went against the concept of a Europeandeposit guarantee scheme, analysts said.
Credit ratings agency Moody's said the Cyprus move was"credit negative" for depositors in other countries, "since thisis a significant step toward limiting or removing systemicsupport for bank creditors across Europe."
Analysts said it also raised the threat that other tabooscould be broken, such as the protection of senior bank debt.
The cost to insure the debt of Spanish, Italian andPortuguese banks increased, with Santander's five-year creditdefault swaps widening by 30 basis points and UniCredit wideningby 23.5bp by 0930 GMT, according to Markit. (Additional reporting by Laura Noonan and Natalie Harrison;Editing by Anthony Barker and David Holmes)
