As zero hour approaches, a small island population watches and waits, consumed with anxiety and simmering with resentment. "This is the darkest week in Cyprus since the 1974 invasion," said Hubert Faustmann, associate professor of history and politics at the University of Nicosia. "The island has been put on the Greek path. What lies ahead are further cuts, austerity measures, more bailouts, because it won't be able to repay the loans, endless misery and recession. It will take years to recover."

"I have never been so frightened in my life," said Maria Panayides, one of thousands of Cypriots who last week rushed to withdraw cash from ATMs.

Cypriots are torn between fury and fear. On Saturday, despite signs that the country's politicians were edging closer to brokering a deal with rescuers at the European Union and International Monetary Fund, it was panic that had taken over as people stormed supermarkets, jammed streets with cars and piled every conceivable product into trolleys. "It may be the very last time I can use this," said one man waving a credit card outside Athienitis, a mega-store in Nicosia. "We might not have banks next week."

"We're overwhelmed," said Marios Hadjichristofi, the shop's customer care officer. "Everyone is calling in, asking if they can still conduct transactions without cash."

The drama engulfing the eurozone's third smallest economy deepened on Saturday night as Cyprus's increasingly isolated president, Nicos Anatasiades, flew to Brussels, Democratic Rally party leaders at his side, for urgent talks with top officials. At no other time since the outbreak of Europe's gruelling debt crisis has a politician faced such pressure.

Nearly a year after it suffered devastating losses to a banking system heavily exposed to Greece, Brussels has read the riot act to Cyprus: either the island accepts draconian rescue terms that include killing off its reputation as an offshore tax haven – the engine of its economy, along with tourism – or it goes under.

After hours of negotiations, Nicosia's 56-member parliament looks poised to acquiesce, passing an array of bills aimed solely at raising €5.8bn (£4.9bn), the condition that it must meet to qualify for €10bn in aid.

Crucially, the finance minister, Michalis Sarris, on Saturday signalled that the government was considering revisiting the highly contentious issue of slapping levies on Cypriot bank account holders. The tax, he conceded, could be as high as 25%. This was a U-turn that no democratically elected government likes to make. In Cyprus it amounts to political suicide, given that on Tuesday Greek Cypriot MPs described the plan as "bank robbery" and unanimously rejected the proposal after a raucous debate in parliament.

Other desperate gambits have been coming thick and fast. In an equally controversial move, lawmakers also agreed to wind down the island's second biggest bank, Laiki, a step that could affect up to 390,000 depositors and leave 8,000 bank employees unemployed, even if it will also raise close to €3bn.

With the country's solvency hanging by a thread, banks have been closed for the past week and are unlikely to open before Tuesday. Even if a financial assistance programme is agreed by Monday, when the European Central Bank has threatened to cut off emergency funding to failing Cypriot lenders, it will come at an inordinately heavy price. Addressing her MPs in Berlin, German chancellor Angela Merkel last week upped the ante, saying that Cyprus would have to change its business model as an offshore tax haven, where Russian oligarchs have parked over ¤30bn in deposits, or pay the price of being cut loose from the EU.

That is far more easily said in Berlin than done in Nicosia. How does a country transform its economic affairs overnight? The proposed 25% levy on accounts over €100,000 would strike Cyprus's wealthy foreign clients most of all – the vast number of them, 80% according to Citibank, being Russian. The prospect of such an assault on the country's most wealthy bank accounts would have seemed barely credible only a week ago.

Limassol, the port city that is home to the bulk of Cyprus's Russian emigres and expats, stood eerily quiet. Seaside cafes and restaurants, usually bustling with weekend revellers, were largely empty. Some groceries and clothing shops catering to Russians shuttered their doors.

Cypriots working with the country's vast Russian clientele reacted to the proposal with rage. Around $32bn of the accounts in Cypriot banks – nearly half of the total – belong to Russians.

"We would be ready for them to take a bigger haircut from regular Cypriots, but leave the foreigners alone," said a Cypriot lawyer who advises Russian firms on setting up Cyprus-based companies. Russians have flocked to the island in a bid to avoid Russia's politicised justice system and corrupt corporate sphere, while taking advantage of Cyprus's flexible approach to storing what many fear are ill-gotten gains.

A tax on wealthy depositors would destroy Cyprus's reputation as a safe haven. Some analysts have suggested that this was the motivation behind the EU's bailout plan.

At the Lighthouse, a posh Russian-owned cafe overlooking the Mediterranean, a table of wealthy Russian women heatedly discussed the crisis in Cyprus over a bottle of pink champagne. News of the potential 25% levy capped a week of furious negotiating and competing proposals, and the women said they were dubious the proposal would pass.

"Have you seen the draft law? I still believe they will take 10%," said Natasha, 41, who works at the Limassol office of a Russian energy firm. "If they want to take 25%, let them," said Tatyana Pellinen, 51, who has lived on the island for five years with her Finnish husband. "I lost so much in Lehman Brothers already – taking 25% is better than taking 40% or everything."

Russians in Limassol have grown increasingly angry over the spotlight that the crisis in Cyprus has shone on their investments on the island. "I don't know what is laundered, but if Russians didn't [bring money] here there would be no work," said Pellinen. "They tax it, they take it – and suddenly it's dirty money. This is all being built up so that everyone is OK with money being taken from Russians."

From being a sunny destination favoured by millions of British tourists every year, Cyprus this weekend resembled a country on its knees. With the collapse of its vibrant offshore banking system now the price of financial assistance, Cyprus's 800,000-strong population, almost overnight, faces economic destitution, mass unemployment and plummeting living standards.

"Most Cypriots will see the rescue package as a destruction package," said Faustmann. "It will lead to a major re-assessment of how they, and politicians, view Europe."