Eurozone finance ministers gave their approval to an EU-IMF plan for restructuring Cyprus' banking sector and overhaul the country's two largest banks.
The plan will see the creation of a "good bank" and a "bad bank". The Popular Bank of Cyprus, known as Laiki, will effectively be shut down.
Deposits below 100,000 euros in Laiki will be transferred to Bank of Cyprus. Deposits above 100,000 euros, which under EU law are not insured, will be frozen and will be used to resolve debt.
Earlier, an EU spokesman said there would be no "levy" imposed on any Cypriot banks, with the package requiring a full "bail-in" of uninsured depositors, which is likely to mean heavy losses for those with large holdings in Laiki and potentially Bank of Cyprus, where many Russians hold bank accounts.
IMF's Christine Lagarde and the German finance minister at the Eurogroup An official involved in the Eurogroup discussions said the plan had been "approved".
The deal emerged after fraught negotiations between President Nicos Anastasiades and heads of the EU, the European Central Bank and the IMF Fund - hours before a deadline to avert a collapse of the banking system.
It came as a powerful firecracker went off inside a Bank of Cyprus branch in Limassol causing some damage, according to Cyprus' state-run news agency.
News website Sigmalive said two assailants smashed a glass door and set off the firecracker, but arriving firefighters quickly doused the flames.
The country must raise 5.8bn euros (£4.9bn) before it can receive an EU bailout of 10bn euros (£8.5bn).
Cyprus's outsized banking sector was crippled by exposure to crisis-hit Greece.
In a vote on Tuesday, the country's 56-seat parliament dismissed a levy on depositors as "bank robbery".
The country's finance minister Michael Sarris then spent three fruitless days in Moscow trying to win help from Russia, whose citizens have billions of euros at stake.
Cypriots were outraged by the original proposal and have been queuing at cash machines ever since bank doors were closed last weekend on the orders of the government.
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