Cyprus announced on Monday it is applying to the European Union (EU) for bailout funds to help recapitalize its banking system.
"Cyprus Republic has today notified the competent European Authorities of its decision to submit an application to the Eurozone member countries for economic support by EFSF/ESM," an official announcement said.
It added that the purpose of the funds sought is to contain risks to the Cyprus economy, "especially the negative repercussions resulting from the banking system because of its extensive exposure to the Greek economy."
Cyprus has to raise at least 1.8 billion euros (2.25 billion U.S. dollars) by the end of June to recapitalize Cyprus Popular Bank, the second largest lender of the island.
The government is also seeking urgent bilateral loans from Russia and China to refinance its sovereign debt maturing next year.
President Demetris Christofias has called a meeting of political leaders to consult them before officially applying for the bailout. They are expected to meet him on Tuesday afternoon, with discussions of additional austerity package top on the agenda.
Government spokesman Stefanos Stefanou confirmed that the government has approved additional austerity measures to contain public deficit to 3 percent at the end of the year, down from 6.5 percent in 2011, adding that details of the conditions coming with the bailout money will be negotiated in detail over the next few days.
Cyprus is the third-smallest EU economy and its bank recapitalization bill amounts to 10 percent of its GDP.
Fitch rating agency said on Monday the recapitalization bill may go up to 4 billion euros, equivalent to 23 percent of GDP.
Fitch, citing the need for EFSF bailout for the banking sector recapitalization and the extensive lending by Cyprus's bank branches operating in Greece to Greek households and businesses, further downgraded Cyprus's financing ability to BB+ from BBB- with a negative outlook.