Under the palm trees of Larnaca's waterfront promenade, George Kyprou was staring out to sea and scratching his head. "I don't know what to do," he said. Like most Cypriots, he was astonished to wake up one bank holiday weekend morning to discover the government had seized up to 10% of everyone's savings from their bank accounts without warning.

Kyprou, 62, born in Larnaca, had worked most of his life as a chauffeur and driver in England, proudly buying his London council flat and scrimping to put aside money in Cyprus for when he returned for holidays and eventually to retire. "I'd put aside £50 here, £20 there, all my life," he said. Over decades, he had built up around €6,000 (£5,200) in a Larnaca account. "It was a state building society; I assumed it was safe."

But now, as depositors holding less than €100,000 are made to pay 6.75% and those with more than €100,000 9.9% as part of a €10bn (£8.7bn) bailout agreed in Brussels, Kyprou stands to lose €400 overnight. "That's a lot for someone like me," he said.

When he heard the news on Saturday morning, he rushed to the cashpoint and queued with others who were panicking and trying to take out as much money as they could. The media reported a run on ATMs that were depleted by mid-afternoon. But with Cyprus taking immediate steps to prevent any money transfers over the weekend, ordinary savers realised there was little they could do to lessen the blow.

On Sunday the parliament of Cyprus postponed a crucial debate and vote on the move until Monday, without giving a reason. Banks will remain closed for several days because of the holiday.

In Larnaca, the third largest city on the tiny eastern Mediterranean island, the queues at cashpoints had shrunk by Sunday night but the mood was one of shock, anger and injustice. Only three weeks ago, Cyprus voted in elections where, for once, the island's defining issue of its 40-year-old division into the Greek-speaking south and the Turkish north was overtaken by more urgent worries. The country of 1.1 million people had been ravaged by its worst economic crisis since the 1970s, with unemployment at a record high of 15% and fears of meltdown in a bloated banking sector which was more than eight times the size of the nation's economy. The Conservative winner Nicos Anastasiades promised at least that savers' deposits were safe. This weekend he accepted bailout terms that turned that promise on its head.

Stelios Zinga, a truck driver in his late 50s, had joined the cashpoint queues. "People are panicking, they're afraid of losing their money, they don't feel they can trust banks anymore," he said. "The problem with this levy is that it is the cautious, working-class people who are being made to pay."

His work as a driver had already suffered from the economic downturn, and he now felt it would plummet. The classic Cypriot education ethic, where hard-saving parents supported their children studying abroad, would feel the strain, he said. "My son is studying chemical engineering in Edinburgh. I'm worried I won't be able to get money to him."

Christiana Konteati, 26, a lawyer, who finished a degree in London three years ago, said: "We're really worried that this is only the beginning: next will come salary cuts, austerity, rising unemployment and very likely people going abroad to work."

She said the younger generation didn't have savings to fear for but a large part of her graduate friends were unemployed including a translator, a marketing graduate, a physicist and an accountant.

One flabbergasted Larnaca bank employee, 28, was grabbing a coffee before returning to the rolling TV news he said the nation was glued to. He found the bank levy an "extraordinary" surprise. "Are we the guinea pigs? There's a feeling they are trying this out on us before they do it elsewhere. Let's see how the markets react."

Further along the promenade, some bristled at the charge in Europe that Cyprus, flush with Russian cash, was a conduit for money-laundering and that the European decision-makers felt the rich Russian depositors should be made to pay. More than 25% of bank deposits and about one-third of foreign investments in Cyprus come from Russia. So many Russians now live in the port city of Limassol that it has been dubbed "Limassolgrad". "We need foreign investment and it could now shrink," said one student, arguing that most savers in Cyprus were Cypriots.

Many felt resentment at the EU and its financial decision-makers would grow. Others wondered whether a better solution to the nation's financial woes was the recent discovery of gas deposits that amounted to more gas than Cyprus could use in over a century, and which it hopes to begin exporting by 2018, potentially meeting a major part of the EU's annual demand.

As always, the emotional resonance from the island's bloody division 40 years ago, was never far from the surface. One retired teacher who had to flee her village in the north in 1974, said: "They're taking money, but at least now I have a home and clothes to change into. Back then, we had nothing. Cyprus will come through this somehow."