FRANKFURT (MarketWatch) — Cyprus’s lawmakers could move within hours to finish a plan that would restructure its second-largest bank, impose capital controls and levy a tax on large bank deposits in a bid to unlock an international bailout and remain part of the euro currency, news reports said on Friday.

“We believe that in the next few hours we could be able, with a lot of difficulties, to reach a framework that would be in the policies of the European Union, the European Central Bank and the International Monetary Fund,” said Averof Neophytou, leader of the country’s ruling party, according to Dow Jones Newswires.

Cyprus officials are aiming to complete legislation that will raise funds needed to secure a bailout, but must ensure the package passes muster with its euro-zone partners, who have taken a hard line in demanding that the country shrink its outsize banking sector.

Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro-zone finance ministers, said on Friday that European officials were focused on keeping Cyprus in the euro zone.

“All kinds of scenarios are possible, and the scenarios we’re focusing on are to come to a joint solution in which Cyprus is saved but in which the banking sector continues in a smaller but healthier form, and that’s going to involve a lot of negotiations,” he said, according to Reuters.

Cyprus Finance Minister said Michael Sarris was quoted as saying a tax on bank deposits is “clearly on the table” after being rejected by the country’s parliament earlier this week.

Apparent optimism over a potential deal helped lift the euro EURUSD, -0.27% above the $1.30 level versus the dollar. Most European stock markets slipped on Friday, while Wall Street posted gains. The Tell: Three reasons why the euro is rising despite Cyprus turmoil.

Cyprus’s lawmakers need to make “big decisions” Friday in order to prevent a financial disaster, the government said as parliament prepared to debate a range of crisis proposals.

“The next few hours will determine the future of the country,” government spokesman Christos Stylianides said in a televised statement.

Cash is king in Cyprus

“Undoubtedly, there will also be painful aspects in any decision taken, but the country must be saved,” he said at a news conference as the government called on all to “assume our share of the responsibility.”

Cyprus last Saturday shocked markets by announcing a one-off levy on Cypriot bank accounts to raise 5.8 billion euros ($7.5 billion) to shore up its finances in exchange for a €10 billion bailout from its institutional lenders, the European Central Bank, the International Monetary Fund and the European Commission, collectively known as the Troika.

But in yet another extraordinary development, the country’s parliament on Tuesday refused to pass legislation to support the bank-deposit tax, even after some exemptions for smaller accounts were proposed.

That provoked a threat from the ECB that it would cut off emergency lending to banks in Cyprus, with effect from next Monday night. If that happened, Cyprus would likely be forced to leave the euro, analysts say. The Tell: What will actually happen if Cyprus deal fails?

Cyprus had turned to Russia as another potential source of cash. But Sarris, who had traveled to Moscow for talks, left returned to Cyprus empty-handed on Friday.

Cyprus is now trying to come up with an alternative plan that will pass muster with European officials before the ECB’s deadline.

That might include levying a version of the unpopular tax on bank deposits, as a more palatable alternative to default.

The country also is considering unprecedented restrictions on financial transactions, according to The Wall Street Journal. These could allow authorities to restrict noncash transactions, curtail check cashing, limit withdrawals and even convert checking accounts into fixed-term deposits when banks reopen. They have been closed since March 16, and are scheduled to reopen on Tuesday; Monday is a national holiday.

On Thursday, reports emerged that Cyprus Popular Bank PCL, also known as Laiki Bank, will be split into a “good bank” and “bad bank” to avoid bankruptcy under a revised proposal.

Bank deposits totaling €100,000 or less would also be protected, according to Cyprus central-bank Gov. Panicos Demetriades. See: ECB tells Cyprus to strike deal by Monday or else.

But German Chancellor Angela Merkel, in remarks to lawmakers in Berlin, said a plan to rope pension funds into a solidarity fund that would be used to securitize new bonds wasn’t acceptable, Reuters reported, citing parliamentary sources.

Weighing a deposit-tax against an euro-zone exit, Brown Brothers Harriman global currency strategist Marc Chandler said: “We think Cypriots’ lives will be made significantly worse on an exit. Small depositors will not simply see 6.5% of their savings taken, but will lose much of savings.”

“The banking system will collapse and the means to recapitalizing it are not obvious,” said Chandler of Cyprus potentially leaving the euro zone.

In a statement Thursday, the Eurogroup said it “stands ready to discuss with the Cypriot authorities a draft new proposal, which it expects the Cyprus authorities to present as rapidly as possible.”

Deposit tax difficult to avoid

Bank of America Merrill Lynch’s chief global strategist Michael Hartnett said the brokerage believes Cyprus will have no choice but to tax at least some of its banks’ deposit holders.

“Our European macro team’s central case is that the Troika can take a hard line because Cyprus is small enough to be contained and will likely eventually accept some form of deposit tax.”

The strategist said Merrill is assuming a protracted process, which could drag equity markets lower at first. However, once a deal is agreed, there will be scope for a relief rally, the broker believes.

Markets could see pain if Merrill Lynch’s more bearish case surfaces, in which core euro-zone nations miscalculate the mood in southern Europe, and Cyprus decides to opt for default.

“The threat of a euro exit could induce a sharp selloff in European markets with knock-on effects on global markets,” said Hartnett.

“In addition, given the still-unknown reaction from Russia and our recent downgrades to Chinese growth, we think it is too early to look for a reversal of the recent underperformance of emerging markets and European equities,” the strategist said.