* Islanders fume as they queue to withdraw cash
* Depositors to forfeit up to 10 percent of savings
* Parliament needs to approve 'deposit levy'
* Powerful lawmaker says shocked at EU decision
By Michele Kambas
NICOSIA, March 16 Frustration over a delayed bailout turned to incredulity and anger in Cyprus on Saturday as islanders woke up to news that savers would be footing part of the bill to avert national bankruptcy.
In a radical departure from previous euro zone rescues for Greece, Ireland, Portugal and Spain, finance ministers struck a deal to lend the indebted island 10 billion euros ($13 billion). But in return, depositors would have to forfeit up to 10 percent of their savings.
Small queues of people gathered at cash machines across the island to withdraw money on Saturday, while co-operative credit societies had to shut to prevent a run on deposits.
A levy of 9.9 percent on deposits exceeding 100,000 euros, and of 6.7 percent on anything below that, is expected to generate 5.8 billion euros for Cyprus, which first applied for a bailout in June 2012.
The levy must be ratified by parliament before banks open on Tuesday, since Monday is a public holiday.
"My initial reaction is one of shock," said Nicholas Papadopoulos, head of parliament's financial affairs committee. "This decision is much worse than what we expected and contrary to what the government was assuring us, right up until last night," he told Reuters.
Papadopoulos, vice-chairman of the Democratic Party which is a coalition partner in government, said he did not want to predict how parliament would vote.
"If we go ahead with this, there is a great risk it is not the end, the banking system will still face instability because it will face a significant capital flight," he said.
It was unclear when parliament would convene, but banks had already taken steps to freeze the equivalent in deposit accounts.
Cyprus's euro zone partners had expressed an unwillingness to bail out an island some say is awash with Russian cash. But of an estimated 69 billion euros in the Cypriot banking system, only 37 percent is held by non-residents.
"I am extremely angry. I worked years and years to get it together and now I am losing it on the say-so of the Dutch and the Germans. It's not hitting the Russians," said British Cypriot Andy Georgiou, 54.
Georgiou moved his life savings to Cyprus in mid-2012, after selling his home in London.
The levy is a bitter pill for Cyprus, which took a disproportionately large hit from Greece's debt restructuring in early 2012 because of the close financial ties between the two countries. Its two largest banks sustained combined losses of 4.5 billion euros, equivalent to a quarter of the island's gross domestic product.
"I would like to know where that EU solidarity is. What did we get? Nothing," said mechanic Yiannis Pavlou, 28.
Savers reported they could withdraw cash, but couldn't carry out electronic transfers of funds. In Larnaca, co-op credit societies had to shut for business when people started queueing for their deposits.
"I thought anything below 100,000 euros would be safe," said private sector worker Andri Menelaou, 25, referring to a deposit threshold guaranteed by the state. "I don't have much but I don't see why I should pay for bank mistakes." ($1 = 0.7654 euros) (Editing by Mark Trevelyan)