* Cyprus investor tax plan reignites debt fears
* Euro zone exposed banks fall furthest
* M&S rallies on Qatari 8 bln pounds bid talk
By David Brett
LONDON, March 18 (Reuters) - Britain's FTSE 100 fell 1 percent early on Monday with banks suffering the sharpest falls as shock news over the weekend that Cyprus planned to impose a tax on bank deposits as part of a bailout package heightened fears of contagion in the euro zone.
By 0829 GMT, the FTSE 100 was down 62.31 points, or 1 percent, at 6,427.34.
In a radical departure from previous aid packages, euro zone finance ministers want Cyprus savers to forfeit a portion of deposits in return for a 10 billion euro ($13 billion) bailout.
Banks, large holders of deposits within the euro zone, fell 1.7 percent on concerns over their exposure to any turmoil and the knock-on effect within the region.
He said the specifics of Cyprus's situation, in terms of the outsized nature of its deposits and the make-up of some of the larger depositors, is not repeated across the euro zone, so confidence in bank deposits on other peripheral European regions, therefore, ought to hold firm.
"In general, however, we remain cautious on the medium term story for Europe. We expect economic data and political infighting to weigh on European markets all summer," Foster said.
The bailout for Cyprus including the one off tax sent risk aversion through the roof. The blue chip euro zone volatility index -- a crude gauge of investor fear -- jumped 23 percent.
And while the proposed levy still has to pass the parliament, the escalation of the euro zone debt crisis sent traders fleeing from equities into safer havens.
Analyst at Liberum said the risk premia on euro zone exposed assets are likely to temporarily increase.
Liberum said a 4 percent to 7 percent sell-off in Barclays , Royal Bank of Scotland Lloyds Banking Group could be possible.
"For UK Banks if the probability of breakup of the Eurozone increased from 15 percent (our current assumption) to 25 percent, fair value per share for the domestic UK banks decreases by on average 7 percent.
Away from the banks, British retailer Marks & Spencer (Other OTC: MAKSY - news) stole the headlines, rising 8 percent -- one of just four risers on the FTSE 100 -- after a report in The Sunday Times said the Qatar Investment Authority, the Gulf state's sovereign wealth fund, wants to assemble a consortium to mount an 8 billion pound ($12.1 billion) takeover.
The newspaper cited senior City sources as saying the QIA has approached several large private equity houses, including CVC Capital Partners CVC.UL, to gauge their interest in participating, and has spoken to lenders about financing an offer.
"From a tactical perspective, M&S is vulnerable to a bid, as trading and profits are under pressure, with nothing to show yet for the big investments made in online systems and warehousing and the changes in the clothing team," said independent retail analyst Nick Bubb.
(Reporting by David Brett/editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)