Cyprus has secured a deal with international lenders to shut down its second largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians, in return for a €10bn bailout.
The agreement came hours before a deadline to avert a collapse of the banking system.
There were tense negotiations between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund.
The plan will spare the east Mediterranean island a financial meltdown.
The Popular Bank of Cyprus, also known as Laiki, will be wound down and deposits below €100,000 will be shifted to the Bank of Cyprus to create a "good bank".
Deposits above €100,000 in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki's debts and recapitalise Bank of Cyprus through a deposit/equity conversion.
Russia has reacted with anger to the bailout agreement.
"In my view, the stealing of what has already been stolen continues," Russian Prime Minister Dmitry Medvedev was quoted by news agencies as telling a meeting of government officials.
Speaking in Brussels, Minister for Finance Michael Noonan said the new deal was better than the Cypriot plan rejected last week to levy small savers.
The raid on uninsured Laiki depositors is expected to raise €4.2bn.
Laiki will effectively be shuttered, with thousands of job losses.
Officials said senior bondholders in Laiki would be wiped out and those in Bank of Cyprus would have to make a contribution.
An EU spokesman said no across-the-board levy or tax would be imposed on deposits in Cypriot banks, although the hit on large account holders in the two biggest banks is likely to be far greater than initially planned.
A first attempt at a deal last week collapsed when the Cypriot parliament rejected a proposed levy on all deposits.
German Finance Minister Wolfgang Schaeuble said politicians would not need to vote on the new scheme, since they had already enacted a law setting procedures for bank resolution.
A senior source in the talks said President Anastasiades, who is barely a month in office, threatened to resign at one stage yesterday if he was pushed too far.
He left EU headquarters without making any comment after he was forced to back down on his efforts to shield big account holders.
Diplomats said the president had fought hard to preserve the country's business model as an off-shore financial centre drawing huge sums from wealthy Russians and Britons, but had lost.
The EU and IMF required that Cyprus raise €5.8bn from its banking sector towards its own financial rescue in return for €10bn in international loans.
The head of the EU rescue fund said Cyprus should receive the first emergency funds in May.
IMF Chief Christine Lagarde said the agreement was "a comprehensive and credible plan" that addresses the core problem of the banking system.
"This agreement provides the basis for restoring trust in the banking system, which is key to supporting growth," she said in a statement.
With banks closed for the last week, the Central Bank of Cyprus imposed a €100 per day limit on withdrawals from cash machines at the two biggest banks to avert a run.
French Finance Minister Pierre Moscovici rejected charges that the EU had brought Cypriots to their knees, saying it was the island's offshore business model that had failed.
"To all those who say that we are strangling an entire people ... Cyprus is a casino economy that was on the brink of bankruptcy," he said.
The euro gained against the dollar on the news in early Asian trading.
Analysts had said failure to clinch a deal could cause a financial market selloff.
However, some said the island's small size, which accounts for just 0.2% of the eurozone's economic output, meant contagion would be limited.
The abandoned plan for a levy on bank deposits had unsettled investors since it represented an unprecedented step in Europe's handling of a debt crisis that has spread from Greece, to Ireland, Portugal, Spain and Italy.
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