Cyprus lawmakers reject bank tax; bailout in disarray

Cyprus's parliament overwhelmingly rejected a proposed levy on savings in banks as a condition for a European bailout today, throwing international efforts to rescue the latest casualty of the euro zone debt crisis into disarray.

The vote in the tiny legislature was a stunning setback for the 17-nation bloc; lawmakers in Greece, Portugal, Ireland, Spain and Italy have all accepted unpopular austerity measures over the last three years to secure European aid.

With hundreds of demonstrators facing riot police outside parliament and chanting "They're drinking our blood," the ruling party abstained and 36 other lawmakers voted unanimously to reject the bill, bringing the Mediterranean island, one of the smallest European states, to the brink of financial meltdown.

EU countries said before the vote that they would withhold 10 billion euros ($12.9 billion) in bailout loans unless depositors in Cyprus, including small savers, shared the cost of the rescue; the European Central Bank had threatened to end emergency lending assistance for teetering Cypriot banks, which were hard hit by the financial crisis in neighboring Greece.

The demonstrators were unbowed: "This is a great decision for Cyprus," said Andreas Miltiadou, a 65-year-old pensioner among the crowd. "The voice of the people was heard."

The ECB said it "took note" of the vote and remained "committed to provide liquidity as needed within the existing rules."

Newly elected President Nicos Anastasiades earlier told reporters he expected parliament to reject the tax on bank deposits - "because they feel and they think that it is unjust and it's against the interests of Cyprus at large".

He was due to meet party leaders at 9 a.m. (0700 GMT) on Wednesday to explore a way forward.

Europe's demand at the weekend that Cyprus break with previous EU practice and impose a levy on bank accounts sparked outrage among Cypriots, who emptied bank cash machines, and unsettled financial markets.

Combined with Anastasiades' refusal to accept a levy of more than 10 percent on deposits above 100,000 euros, that meant taxing smaller accounts too, which savers had thought were protected by state guarantees.

An important issue in negotiations has been the high level of deposits held in the island's banks by non-EU citizens and companies, notably from Russia, where Cyprus has established itself as a major provider of offshore financial services.

Cypriot Finance Minister Michael Sarris flew to Moscow today to seek Russian financial assistance. He denied by text message to Reuters reports that he had resigned, which had rattled markets' nerves as lawmakers were poised to vote.