EU calls on Cyprus to set capital controls: source

The European Union is urging Cyprus to place capital controls on the island's troubled banks to avoid a financial collapse and an exit from the eurozone, an EU source said on Thursday.

"Cypriot authorities have three things to do before Tuesday: Present a credible and viable plan B to replace the rescue rejected by parliament, install long-term controls on capital placed in the banks, and prepare to merge the two main banks in trouble," the senior European Union source said, adding that there was otherwise a risk of Cyprus having to leave the eurozone.

While Cypriot banks are set to remain closed until Tuesday, orders have been placed to withdraw billions of euros as soon as business reopens, the source said.

The EU source said withdrawals of seven billion euros were rumoured with fears the cash bleeding could be even more severe.

The source said the decision to impose capital controls was a political one and up to the Cypriot government.

If a block on capital fleeing the country is not installed urgently, the Cypriot banks will collapse putting the government on the hook to pay out deposit insurance to all clients up to 100,000 euros.

The comment came as anxious Cypriots queued outside ATM machines on Thursday to withdraw cash as fears rose that the country's banking meltdown will mean its largest banks close indefinitely.

Cyprus politicians meanwhile agreed to set up an investment fund as part of a Plan B to secure a bailout deal with eurozone lenders, while ruling out a tax on bank deposits that sank an earlier deal.