* Cypriot ruling party says deal in line with EU demands
* Party says deal could be reached in hours
* ECB says to cut off bank funds without bailout deal by Monday
* Cypriot finance minister says deposit levy “on the table”
By Michele Kambas and Costas Pitas
NICOSIA, March 22 (Reuters) - Cyprus was poised for a dramatic U-turn on taxing big savers in its stricken banks on Friday as it raced to clinch a bailout from the European Union to avert financial meltdown.
The ruling party said a package to raise the 5.8 billion euros demanded by the EU was hours away, spurred by a Monday deadline set by the European Central Bank, which said it will cut off cash for Cypriot banks if no bailout is agreed.
Cyprus moved perilously close to bankruptcy when its parliament rejected terms of an EU bailout on Tuesday. Cypriots were enraged by a levy on bank accounts, including small holdings of ordinary savers as well as large accounts, many held by foreign investors.
Finance Minister Michael Sarris, fresh from a failed trip to win funds from Moscow, said a bank deposit levy was back “on the table”.
Averof Neophytou, deputy leader of the ruling Democratic Rally party, said Cypriot political leaders were close to a compromise that would let parliament reverse its rejection of the rescue package.
Party officials told Reuters that discussions were centred on a levy on depositors holding over 100,000 euros. One official said the tax could be limited to big savers at the island’s biggest lender, Bank of Cyprus, at 20 percent.
In a sign it expects a solution soon, the group of euro zone finance ministers called a new meeting for Sunday in Brussels, two sources in the currency zone told Reuters. A Cyprus government official said President Nicos Anastasiades would fly to Brussels over the weekend if a solution is found.
With hundreds of demonstrators facing off with riot police outside parliament, lawmakers began late night debate of bills on other measures - including nationalising pension funds, pooling state assets and splitting the second-largest lender, Cyprus Popular Bank, into good and bad assets. Restoring the bank levy was not yet on the agenda there.
Neophytou said there was “cautious optimism that in the next few hours we may be able to reach an agreed platform” consistent with the framework originally agreed with the EU.
In Finland, an ally of Germany in disciplining euro zone partners, European affairs minister Alexander Stubb told Reuters he was confident Cyprus would accept EU rescue terms: “Because there are no other options”.
The pace of the unfolding drama has stunned Cypriots, who barely a month ago elected conservative Anastasiades on a mandate to secure a bailout.
Lawmakers threw the bill out on Tuesday, calling it “bank robbery” - a stunning rejection of the kind of strict austerity signed up to by Portugal, Ireland, Greece, Spain and Italy over the last three years of Europe’s debt crisis.
Loss of the ECB lifeline would effectively cause the banking system to collapse and could force Cyprus to give up the euro. Germany warned Cyprus it was “playing with fire”.
Moody’s downgraded its credit rating on deposits in Cypriot banks to Caa3, just two rungs from the bottom on its 11-grade scale of junk debt.
Euro zone leaders, led by Germany, have offered Cyprus 10 billion euros ($13 billion), but only on condition it raises 5.8 billion of its own.
They say the only way to find that cash is from depositors who have 68 billion euros in Cypriot banks, including 38 billion in accounts of more than 100,000 euros - enormous sums for an island of 1.1 million people which could never sustain such a big financial system on its own.
Many of Cyprus’s biggest depositors are foreigners, including Russians who have been major contributors to the boom in Cypriot banks since the island adopted the euro in 2008.
Taking a first step toward financial consolidation, Cyprus arranged on Friday for the takeover of big Greek units of its two biggest banks by a Greek competitor.
Shares in Piraeus Bank in Athens shot up 20 percent after news that Piraeus would take control of the Greek units of Bank of Cyprus and Popular Bank.
“EDGE OF AN ABYSS”
With banks in Cyprus closed until Tuesday, depositors, who have been besieging bank cash machines all week, lined up again on Friday to withdraw what they could.
“Our so-called friends and partners sold us out,” said Marios Panayides, 65, a protester at the parliament. “They have completely abandoned us on the edge of an abyss.”
Retailers, facing cash-on-delivery demands from suppliers, warned stocks were running low.
“At the moment, supplies will last another two or three days,” said Adamos Hadijadamou, head of Cyprus’s Association of Supermarkets. “We’ll have a problem if this is not resolved by next week.”
The Bank of Cyprus urged the government to go back and cut a deal with the EU under which larger deposits over 100,000 euros would be taxed. It was preferable, it said, to a collapse of the system and ejection from the euro which would wipe out assets.
“There must be no further delay,” the bank said.
EU officials criticise Cyprus for initially insisting on taxing even small savers whose deposits up to 100,000 euros benefit from a state guarantee. Cypriot leaders did not want to shift the whole burden to bigger depositors in the apparent hope of saving Cyprus’s offshore banking industry.
EU leaders, notably Germans who face an election in six months, are loathe to spend European taxpayers’ money on a bailout if rich Russian investors escape with no losses.
German Chancellor Angela Merkel told lawmakers that while she wanted to keep Cyprus in the euro zone, it must first recognise it had no future as an offshore financial centre for wealthy Russians and Britons, two parliamentarians told Reuters.
Her finance minister, Wolfgang Schaeuble, said that muted reactions to the crisis in financial markets showed the euro zone was able to contain the Cyprus problem.
The Dutch head of the euro zone finance ministers’ group, Jeroen Dijsselbloem, said the group wanted to keep Cyprus in the currency union. But when asked, he did not rule out an exit.
“All kinds of scenarios are possible and the scenarios we’re focusing on are to come to a joint solution in which Cyprus is saved but in which the banking sector continues in a smaller but healthier form.”