The S&P/TSX composite ended down 48.27 points at 12,781.76 as it pushed away from a steeper loss of nearly 71 points earlier in the session. The TSX Venture Exchange dipped 5.37 points to 1,111.78.
The Canadian dollar fell 0.29 of a cent to 97.82 cents US.
In Cyprus, lawmakers postponed until Tuesday night a vote on a deposit tax of 6.75 per cent on accounts of up to €100,000 (US$131,000) and 9.9 per cent on accounts over that amount in a bailout agreement reached with international lenders on the weekend.
The tax is among conditions demanded by international creditors in order for Cyprus to get €10 billion (US$13 billion) in bailout funds.
But the tax on ordinary citizens' savings is an unprecedented step in Europe's 3 1/2-year-old debt crisis and the shock over the threat to private property spread rapidly, sending markets in Britain, German and France down sharply.
While the financials of the country are small, the magnitude of the proposal in Cyprus was great enough that it captured plenty of attention, said Craig Fehr, Canadian markets specialist with Edward Jones in St. Louis.
"If this were to be extrapolated over into countries like Spain or Italy, there would be much larger ripple effects that would occur," he said.
"We don't think that's likely, but the blueprint that this would set is at least alarming."
Banks in Cyprus will remain closed until Thursday as lawmakers try to amend a measure to raid bank accounts in the country.
On Wall Street, the Dow Jones industrials dropped 62.05 points to 14,452.06. The Nasdaq was down 11.48 points at 3,237.59 and the S&P 500 index slid 8.60 points to 1,552.10.
In commodities, the April crude contract on the New York Mercantile Exchange rose 29 cents to end at US$93.74 a barrel, as TSX energy stocks made the steepest decline, off 0.9 per cent.
Copper took a significant hit from the concerns in Europe, with the May contract losing 9.3 cents to settle at US$3.43 a pound. Metals and mining stocks were off 1.3 per cent.
Gold stocks were one of the sole climbers, as April bullion rose $12 to settle at US$1,604.60 an ounce.
In corporate developments, Bombardier Transportation is denying a European newspaper report that it faces large penalties for the late delivery of 59 double-decker inter-city trains ordered in 2010 by Swiss Federal Railways (SBB).
Der Sonntag, quoting unidentified sources, said Bombardier (TSX:BBD.B) faces at least US$487 million (460 million Swiss francs) in penalties for delivering the trains two years late.
Bombardier shares were down 10 cents to $4.18.
On Tuesday, the Federal Open Market Committee will begin a two-day meeting where it is widely expected to affirm its plans to continue its US$85 billion monthly bond purchases, though comments could provide more certainty on how much longer the program will last.
Some policymakers at the U.S. central bank have been concerned that the purchases could eventually unsettle financial markets or cause the Fed to take losses. The purchases, commonly known as quantitative easing, are designed to boost the U.S. economy by increasing liquidity in financial markets.
But the language of the Fed comments will, as always, be put under the microscope.Suggest a correction