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

The vote by the small state's legislature was a stunning setback for the 17-nation euro zone, after lawmakers in Greece, Portugal, Ireland, Spain and Italy had repeatedly 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 in bailout loans unless depositors in Cyprus shared the cost of the rescue, and the European Central Bank has threatened to end emergency lending assistance for teetering Cypriot banks.

But jubilant crowds outside parliament broke into applause, chanting: "Cyprus belongs to its people."

"The voice of the people was heard," said Andreas Miltiadou, a 65-year-old pensioner among the demonstrators. 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."

Europe's demand at the weekend that Cyprus break with previous EU practice and impose a levy on bank accounts sparked outrage among Cypriots and unsettled financial markets. Mr Anastasiades refused to accept a levy of more than 10 percent on deposits above €100,000, which meant taxing smaller accounts too. That would have hurt ordinary savers with deposits that they thought came with a state guarantee. Cypriot Finance Minister Michael Sarris flew to Moscow on Tuesday to seek Russian financial assistance. He denied by text message reports that he had resigned, which rattled nerves as lawmakers were poised to vote.

Reuters