Cyprus stood on the brink of bankruptcy last night after its parliamentarians voted down a bailout deal that would have taxed ordinary savers.
The decision sets up a showdown with its European creditors who are insisting the island contribute to its rescue package or risk going bust.
In order to qualify for €10 billion ($15.6 billion) promised by the International Monetary Fund (IMF), the European Central Bank (ECB) and eurozone finance ministers, Cyprus had to approve the plan.
President Nicos Anastasiades had warned a "no" vote could lead to financial chaos and an eventual exit from the single currency.
Officials say it is just a matter of weeks before the Government runs out of money, leaving it unable to cover civil servants' salaries or welfare payments.
Underlining the sense of panic, the British Government said it was sending a Royal Air Force plane loaded with €1 million to provide emergency loans to British troops, as banks on the island remained closed and cash machines ran out of money.
Just hours before Parliament met to debate the measures, Anastasiades had put forward new proposals in an effort to win over MPs.
The new plan would have seen anyone with less than €20,000 in the bank exempt from the tax. The move was a departure from the deal struck in Brussels at the weekend, which stipulated that all deposits would be charged. Those with between €20,000 and €100,000 would have lost 6.75 per cent of their savings, while those with over €100,000 would have faced a 9.9 per cent tax.
But even this amendment was not enough to convince politicians, 36 of whom voted against the measures, with the other 19 abstaining.
Cyprus needs as much as €17 billion to pull back from the brink after its bloated financial sector was hard hit by the crisis in Greece. The troika of the IMF, the ECB and the European Union have pledged €10 billion in assistance, but only if the Cypriots come up with €5.8 billion themselves. They have also threatened to withdraw ECB emergency funding from two stricken banks.
This funding is key to Cyprus' immediate future. If it disappears, the island's two largest banks will go bust, triggering a fresh crisis that could force Cyprus out of the euro.
Yesterday the ECB pledged to continue funding "within the rules", but given its earlier threats this was met with scepticism in financial circles.
The Cypriot Government is now faced with a tough choice - return to the troika and try to renegotiate the terms of the bailout, or attempt to find other sources of finance, possibly from Russia.
Zsolt Darvas, a research fellow at the Brussels-based Bruegel think tank, said it was unlikely to find sympathy at the ECB. "I think the eurogroup would be extremely tough," he said.
The Cypriots' position is not helped by concern that when the banks reopen - which is due to happen today - money could flood out of the country.
EU officials claim Russia is unlikely to provide anything near the level of assistance Cyprus needs. Anastasiades has also been unwilling to consider a higher tax on deposits over €500,000, fearing a flight of large foreign investors.
The Cypriot Speaker, Yiannakis Omirou, said political leaders would meet Anastasiades today to discuss the next steps, but politicians stressed they wanted any tax on savings removed from the deal.
In a statement on Tuesday, eurozone finance ministers said they were willing to tweak the deal to lessen the burden on small savers, but that Cyprus' contribution had to remain at €5.8 billion. The new proposals put forward yesterday did not reach that figure.