* Cyprus works on tax levy deal to get bailout approved
* NAHB housing market index on tap
* Futures off: S&P 12.8 pts; Dow 92 pts; Nasdaq 23 pts
By Angela Moon
NEW YORK, March 18 (Reuters) - U.S. stock index futures fell sharply on Monday as investors, rattled by a radical bailout plan for Cyprus reached over the weekend that knocked confidence in European banks, became sellers, locking in profits from the recent rally.
Monday's sharp decline comes after Wall Street ended lower on Friday, breaking the Dow Jones industrial average's longest winning streak since 1996. Albeit, the blue chip index is still up nearly 11 percent for year and the S&P 500 is up more than 9 percent so far in 2013.
The announcement that Cyprus would impose a tax on bank accounts as part of a 10 billion euro ($13 billion) bailout shook markets globally, as it broke with previous European practice that depositors' savings were sacrosanct.
"This is disturbing because it creates uncertainty but the euro zone has gone through much worse than this and this is a bit of an excuse for the market to sell," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
"The market needs to rest here."
Cyprus's government was working on a proposal to soften the blow of a bank deposit levy on smaller savers ahead of a parliament vote on Monday on the measure that is central to a euro zone bailout designed to avert bankruptcy.
In the United States, the National Association of Home Builders/Wells Fargo issues the housing market index for March at 10:00 a.m. ET (1400 GMT). Economists in a Reuters survey expect a reading of 47, versus 46 in February.
Europe's Airbus has signed a 18.4-billion-euro deal ($24 billion) with low-cost Indonesian carrier Lion Air for 234 single-aisle passenger planes, poaching one of archrival Boeing's fastest growing customers.
To get its 787 Dreamliner flying again, Boeing Co is testing the plane's volatile battery system to a rigorous standard that the company itself helped develop - but that it never used on the jet.
Highbridge Capital Management, a hedge fund manager owned by JPMorgan Chase & Co, has raised a $5 billion mezzanine debt fund, a spokesman said on Sunday, the latest alternative asset firm seeking to seize on corporate credit opportunities.
S&P 500 futures fell 12.8 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures fell 92 points, and Nasdaq 100 futures lost 23 points.
U.S. futures regulators are looking into whether high-speed traders indulged in "wash trading," a strategy in which they improperly buy and sell futures contracts without taking a position in the market, the Wall Street Journal reported, citing people familiar with the probes.
Directories publishers Dex One Corp and SuperMedia Inc have filed for bankruptcy after failing to win the full support of senior secured lenders for a change to a credit agreement that was needed to complete their planned merger.