NICOSIA (Reuters) - Cash-strapped Cyprus said on Wednesday it will resume talks with international lenders on Friday as it rushes to secure badly needed financial aid in the wake of Greece's debt meltdown.
Cyprus asked the European Union and IMF in June for a bailout, now widely speculated to exceed 10 billion euros or 60 percent of its GDP, after its two largest banks sought state support due to a write-down on their Greek debt holdings.
The east Mediterranean island also needs money to cover its fiscal deficit.
Underlining its economic problems, the European Union forecast on Wednesday that Cyprus would stay mired in recession this year and next as output falls more than previously anticipated.
"The government reaffirms it will work intensively ... for negotiations to continue with the aim of reaching a deal for borrowing from the Support Mechanism as soon as possible," said Stefanos Stefanou, the Cypriot government spokesman.
It is unclear when the talks may be concluded, but Finance Ministry sources said they could drag on through the weekend.
The island, the third-smallest economy in the euro zone, will see its 17.9 billion euro economy contract by 2.3 percent in 2012 and by another 1.7 percent in 2013, the European Commission said in its autumn forecast.
That contrasts starkly with data compiled by the Commission in May, when it anticipated a 0.8 percent fall in output this year and growth of 0.3 percent next.
The economic crisis in neighboring Greece, with which Cyprus has close business ties, has clouded the outlook, the Commission said.
"Any worsening of the economic situation in Greece remains a significant downside risk for Cyprus as well as any further needs of recapitalization for the domestic banks," it said.
Cypriot authorities had earlier expressed hope that financial aid could be clinched by November 12, when euro zone ministers meet in Brussels, and be approved there so that a first tranche of aid can be disbursed this year. It is now unclear when Cyprus will be discussed.
The lenders want to see wage cuts in one of the most highly paid public sector work forces in the euro zone, as well as pension reform, privatizations and the creation of a "bad bank", where soured assets in the banking system will be parked.
Last week, the Cypriot finance minister said there were still disagreements with the troika over privatizations, its call to scrap wage indexation and the recapitalization needs of commercial banks.
Cyprus's leftist government, rooted in labor union activism, has said it disagrees with selling off profitable state assets and wants to modify but not abolish wage indexation.
Unity among Cypriots, Stefanou said, would help broker an agreement which would "safeguard basic workers' conquests" and create conditions for future growth. (Reporting by Michele Kambas; Editing by Hugh Lawson)