The European Union gave Cyprus till Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency zone.

In stark twin warnings yesterday, the European Central Bank said it would cut off liquidity to Cypriot banks and a senior EU official made clear to Reuters that the bloc was ready to see the bankrupt island banished from the euro in the belief it could then contain damage to the wider Euro-pean economy.

The ECB ultimatum came as the island’s leaders struggled to craft a “Plan B” to raise the €5.8 billion contribution demanded by the EU in return for a €10 billion bailout from the EU and IMF; angry Cypriot lawmakers threw out a tax on deposits, calling the EU-backed proposal “bank robbery”.

In a mark of strained relations and confusion, eurozone officials conceded during a conference call on the crisis that Cyprus failed even to join that the situation was “in a mess”.

The Cypriot Government said party leaders had agreed to create a “solidarity fund” that would bundle state assets as the basis for an emergency bond issue, but the speaker of Parliament, Yiannakis Omirou, insisted a revised levy on uninsured bank deposits was not on the table. The European Central Bank, which has kept Cyprus’s banks operating with a liquidity lifeline, said the Government had until Monday to get a deal in place, or funds would be cut off – putting not just the Cypriot economy in jeopardy but billions of euros held on the island by foreigners, notably from Russia.

“Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks,” the ECB said.

In Brussels, a senior European Union official said that an ECB withdrawal would mean Cyprus’s biggest banks being wound up, wiping out the large deposits it has sought to protect, and probably forcing the country to abandon the euro.

“If the financial sector collapses, then they simply have to face a very significant devaluation and faced with that situation, they would have no other way but to start having their own currency,” the EU official said.

Bank branches have been closed all week and are not due to reopen until Tuesday, though ATMs have continued to issue cash.

Several hundred protesters, many of them bank employees, rallied outside parliament after rumours that the island’s second-largest lender, Cyprus Popular Bank, was to be wound up. The central bank issued a swift denial.

Demonstrators chanted “Hands off the bank!” and several jostled with riot police, briefly breaking through a cordon. Cyprus has so far avoided the kind of unrest seen in neighbouring Greece, the epicentre of the eurozone debt crisis and the origin of many of the losses undermining Cypriot banks.

Until this week, the expectation in Brussels and on financial markets had been that the election of a new Cypriot president in February would smooth the path to a bailout.

But although conservative President Nicos Anastasiades struck a deal last weekend in Brussels, it was unanimously rejected by Parliament on Tuesday. While EU lenders, notably Germany, wanted uninsured bank depositors to help ease banks’ debts, Cyprus feared for its future reputation as an offshore banking haven and planned to spread the tax to small savers whose deposits under €100,000 were covered by state insurance.

Cyprus’s central bank governor said he expected to clinch a financial support package by Monday. He did not say how.