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Cyprus Thursday was examining an overhaul of its banking sector to avoid financial meltdown after the European Central Bank threatened to pull the plug on emergency funding for the island's banks.
Bank governor Panicos Demetriades said bills had been drafted "relating to the reorganisation and recovery of the Cypriot banking system".
"This consolidation process will prevent the risk of bank failures and protected in their entirety all insured deposits up to the amount of 100,000 euros ($129,000)," he said as he entered the presidential palace for emergency talks ahead of an expected session of parliament.
As the cabinet went into crisis session, an anxious crowd gathered outside parliament expecting a "Plan B" to secure a eurozone bailout for the banks to be put to a vote later by lawmakers.
Around 200 protesters outside the legislature, mostly employees of the bank in the eye of the storm, including many women, held placards reading "Hands off Laiki," and "Laiki now, what next?" of the Laiki or Cyprus Popular Bank.
The ECB said Cyprus had until Monday to clinch a bailout deal or funds would be cut off, while an EU source warned that unless the island pushed a workable plan through parliament and overhauled its banking sector by Tuesday it risked expulsion from the eurozone.
The government urged against panic as it scrambled out a "Plan B" to resolve the chaos unleashed by an initial plan to tax bank accounts -- many of them Russian -- by 5.8 billion euros ($7.47 billion) to complement 10 billion euros in eurozone and IMF loans between now and 2016.
Part of the package, a government statement said, involves setting up a "solidarity investment fund," which media reported would nationalise provident funds, with bonds issued against future natural gas revenues.
Finance Minister Michalis Sarris, in Moscow seeking Russian help in bailing the island out of its financial mire, told the Cyprus News Agency (CNA) he is looking to persuade Moscow to invest in the solidarity fund.
No other details of Plan B were immediately available, but political leaders emerging from the meeting told reporters that a tax on bank deposits that sank an earlier deal had been ruled out completely.
With Cypriot banks in lockdown until next Tuesday, queues grew at cash dispensers on the island amid fears of an indefinite bank closure.
The Popular Bank announced a limit on cash withdrawals of 260 euros a day because of a "high demand for cash" from its ATMs, which were besieged on Thursday by customers drawing their daily limits of up to 700 euros.
The Central Bank denied rumours the bank was destined never to reopen.
Fears of a run on deposits when banks do reopen prompted the EU to urge Cyprus to place capital controls on the banks to avoid a financial collapse and an exit from the eurozone.
"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.
Orders have been placed to withdraw billions of euros as soon as business reopens on Tuesday, the source said.
The troika of lenders -- the EU, ECB and International Monetary Fund -- agreed to the 10-billion-euro bailout on Saturday on condition that Cyprus raised the other 5.8 billion euros.
Lawmakers on Tuesday flatly rejected a highly unpopular measure that would have slapped a one-time levy of up to 9.9 percent on bank deposits as a condition for the loan, leaving the government scrambling to find other ways to raise cash to repay its debts.
Eurogroup head Jeroen Dijsselbloem warned in Brussels the crisis poses a "systemic risk" that threatens to ricochet through the eurozone.
In Moscow, Prime Minister Dmitry Medvedev slammed the European proposals to solve the Cyprus crisis as "absolutely absurd," further raising tension between Russia and the European Union.
Russians including wealthy tycoons hold between a third and half of all Cypriot deposits and are believed to have more than $30 billion in private and corporate cash in the island's banks.
Despite the large Russian holdings in Cyprus, the island's finance minister failed to make any progress in two days of Moscow talks to secure aid.