British officials say a Royal Air Force plane carrying cash is travelling to Cyprus to provide contingency funds for possible use by British military personnel and their families.

Officials said Tuesday the plane is bringing €1 million (US$1.289 million) that can be loaned to military personnel in case the Mediterranean island's cash machines and debit cards stop working.

Cyprus' economy has been in turmoil since the harsh terms of a bank bailout were announced several days ago.

The Cypriot government sought Tuesday to shield small savers from a plan that is intended to raise €5.8 billion (US$7.5 billion) towards a financial bailout by seizing money from bank accounts.

The plan, which is part of a larger bailout package being negotiated with other European countries, has been met with fury in Cyprus and has sent jitters across financial markets.

Banks in Cyprus will stay shut until Thursday to prevent a bank run before parliament has backed the plan to seize a percentage of bank deposits.

Later on Tuesday, Cypriot lawmakers rejected a critical draft bill that would have seized part of people's bank deposits in order to qualify for a vital international bailout.

The bill, which had been amended Tuesday morning to shield small deposit holders from the deposit tax, was rejected with 36 votes against, 19 abstentions and zero votes in favour. One deputy was absent.

Hundreds of protesters outside parliament cheered in jubilation and sang the national anthem when they heard the bill had not passed.

Cyprus will now have to come up with an alternative plan to raise the money.

If it doesn't, it won't qualify for external rescue loans, the country's banks face collapse and the country could go bankrupt.

Cyprus needed a vote in favour of the bank account confiscation to get €10 billion (US$12.9 billion) in rescue loans from its euro partners and the International Monetary Fund. The money will be used to prop up the banks and help Cyprus pay its bills.

The rejected bill proposed to spare all deposits below €20,000 (US$25,900).

Those between €20,000 and €100,000 ($129,290) would still have a 6.75 per cent charge imposed, and those above €100,000 would have to give up 9.9 per cent of their deposits, in line with the original plan put forward over the weekend.

In a sign of the scale of disagreement over the deposit charge, the country's central bank governor, Panicos Demetriades, recommended that no accounts below €100,000 be touched.

That level represents the amount of savings that are supposed to be insured if a bank collapses.

"The credibility of, and trust in the banking sector depends on this," said Demetriades, who conceded that he expects at least 10 per cent of deposits to be withdrawn when the banks eventually reopen.

Failure to pass the bill could mean no bailout money from the Eurozone and IMF and lead to Cyprus' bankruptcy, which could reignite concerns in financial markets over the single currency's future. That would likely put deposits in the country's banks under even more threat.

Although Cyprus is the smallest Eurozone country to be bailed out, the details of the plan sent shockwaves through the single currency area, as it was the first time savers' banks accounts have been directly targeted.

Other bailed-out countries, such as Greece, Ireland and Portugal, have raised funds by imposing new taxes.

Proponents of the deposit seizure argue that this way gets foreigners who have taken advantage of Cyprus's low-tax regime to share the cost of the bailout of the banks, which have been hit hard by their over-exposure to bad Greek debt.

About a third of all deposits in Cypriot banks are believed to be held by Russians.

Finance Minister Michalis Sarris was flying to Moscow Tuesday afternoon to meet with his Russian counterpart.

Andreas Charalambous, a senior official at the ministry, said the aim is to extend repayment of a €2.5 billion loan Russia granted Cyprus in late 2011 when the country could no longer borrow from international markets.

But he admitted there was a bigger ambition than just an extension of the loan and that Cyprus is looking for "potential interest for further investment in the country".

Opponents say a blanket charge on people's bank accounts would hurt ordinary Cypriots more, and could shake the confidence of all in the country's banking sector.

And by going after deposits, European policymakers have set a precedent that could be repeated in the future. The worry of bank runs across Europe lies at the heart of market concerns.

Charalambous said Cypriot authorities believe depositors should be protected, but that a wholesale exemption for those below €100,000 would mean a "disproportionate" burden on large savers, and a "very detrimental" knock-on effect on economic growth.

HEAVY BURDEN

"Because of the size of the estimated (bailout) needs, the burden on those above €100,000 would be such that it would again impact small people because it would destroy the ability of the country to attract foreign investment," Charalambous said.

In a Monday-night teleconference, Eurozone finance ministers concluded that small depositors should not be hit as hard as others. They said Cyprus should stagger the seizures more, but insisted that the overall take should stay the same.

President Nicos Anastasiades, who was elected less than a month ago, told German Chancellor Angela Merkel Monday night that "the possibility of reducing the requirements from self-raised funds is being explored," a Cypriot government spokesman said.

Christine Lagarde, the head of the International Monetary Fund which is participating in Cyprus' bailout, said in Frankfurt that the IMF was "extremely supportive of the Cypriot authorities' intentions to introduce more progressive rates in the one-off tax".

- AP