CYPRUS is scrambling to overhaul its banking sector to avoid financial meltdown, after the European Central Bank threatened to pull the plug on emergency funding for the island's lenders.
Cypriot politicians have until Monday to approve a Plan B bailout deal with the European Union and International Monetary Fund or face being choked from the European funds, which would likely cause teetering banks to collapse.
One source warned that Cyprus risked expulsion from the eurozone if parliament failed to approve a workable plan to restructure its outsized banking sector by Tuesday.
But MPs adjourned an emergency session late on Thursday without voting on the first two bills in a package of draft legislation the government has drawn up as part of its revised plan.
They said they needed more time to study the plans to set up a "national solidarity fund" and impose capital controls to prevent a run on the banks when they reopen on Tuesday after more than a week.
The new solidarity scheme would nationalise pension funds, with bonds issued against future natural gas revenues. The second bill would "impose temporary restrictive measures on the movement of capital".
Central bank chief Panicos Demetriades said legislation had also been drafted on reorganising the Cypriot banking system.
"This consolidation process will prevent the risk of bank failures and protect in their entirety all insured deposits up to the amount of 100,000 euros ($A124,000)," he said as he entered the presidential palace for emergency talks with the cabinet.
MPs on Tuesday rejected a highly unpopular measure, which would have slapped a one-time levy of up to 9.9 per cent on bank deposits as a condition for the loan.
Speaker of parliament Yiannakis Omirou insisted a revised levy on bank deposits was not on the table, a move seen as placating Russians who are believed to have more than $US30 billion ($A28.9 billion) in private and corporate cash in Cyprus banks.
Around 200 people protested outside the legislature, mostly employees of the Laiki or Cyprus Popular Bank, which is in the eye of the storm.
As the government urged people not to panic, Popular Bank announced a limit on withdrawals of 260 euros a day because of a "high demand for cash" from its ATMs, under siege by customers drawing their daily limits of up to 700 euros.
Acting leader of the ruling Disy party Averof Neophytou said restructuring Popular Bank would provide 100-per cent protection for 361,000 out of 379,000 account holders.
The remainder would not enjoy full protection because they exceeded the 100,000-euro limit for deposit insurance.
He added that restructuring the banks would also cut their recapitalisation needs, meaning the sum Cyprus needs to raise from its own resources in return for a 10-billion-euro bailout would be reduced from 5.8 billion euros to 3.5 billion.
The troika of lenders - the EU, ECB and International Monetary Fund - agreed to the 10-billion-euro bailout on Saturday provided Cyprus came up with the rest.
The chairman of the Eurogroup of finance ministers, Jeroen Dijsselbloem, said currency partners were willing to work with Nicosia on its new plans.
"The Eurogroup stands ready to discuss with the Cypriot authorities a draft new proposal, which it expects the Cyprus authorities to present as rapidly as possible," Dijsselbloem said after a two-hour conference call with fellow ministers.
