Milan, March 25 - Fears over the outlook for banks in Europe after Monday's deal in Cyprus forced a haircut on investors there, caused a dramatic drop in the value of Italy's major financial exchange. On the Milan Stock Exchange, the FTSE-Mib fell by fully 2.5% to close Monday's trading at 15,644 points. Most other European markets also took significant losses on the day, but Milan suffered the greatest hit as investors fretted over the outlook for banks and over the results of last month's general election in Italy. The deal between Cyprus, the European Union, the European Central Bank and the International Monetary Fund will see the country close its second-largest bank in exchange for a bailout of 10 billion euro. However, that will mean heavy losses for investors in the closed bank. Even more frightening for investors across Europe was a late afternoon statement by an EU leader suggesting the Cyprus pact could be a model for any future banking bailouts. Including investors and depositors in the Cypriot bank restructuring will represent a new model for coping with problems in Europe's banking system, said Eurogroup president Jeroen Dijsselbloem. Meanwhile, the spread between Italian and German debt, an indicator of investor confidence in Italian government paper, rose to 328 basis points at close of trading Monday, up from Friday's closing spread of 313 basis points. The yield on ten-year Treasury bonds also climbed to 4.61% Monday. Italian investors also continued to fret over the country's political leadership, as Pier Liugi Bersani of the Democratic Party (PD) raced to find a way to form a new government by a Thursday deadline. With no clear leadership in sight, it's hard to read what future economic and fiscal policies will govern Italy. Frankfurt's DAX slipped by 0.51% to reach 7,870.90 points, while Paris's CAC 40 fell by 1.12% to close at 3,727.98 points, and London's FTSE 100 ended the trading day 0.22% lower, closing at 6,378.38. Spain's IBEX 35 also took a dramatic hit on the day, losing 2.27% to close at 8,140.60 points.