The onerous terms of an European Union 10-billion-euro ($13 billion) bailout for Cyprus will sound the death knell for the island's financial sector and will have a lasting impact on its economy, warned international experts.

As a condition for a desperately-needed 10-billion-euro ($13 billion) bailout, fellow euro zone countries and international creditors on Saturday imposed a levy on all deposits in the island's banks.

Deposits of more than 100,000 euros will be hit with a 9.9 per cent charge, while under that threshold the levy drops to 6.75pc, although negotiations were under way yesterday to change the terms to soften the blow on small depositors.

"The deal by the eurogroup dealt a very heavy blow to Cyprus - it was the death knell for the financial sector," economist Simeon Matsi said.

"Banking is about confidence, if there is no confidence there is no banking sector. No one is going to trust Cyprus anymore, whatever happens," he added.

"The eurogroup, International Monetary Fund and the European Central Bank have managed to destroy the reputation of Cyprus."

He also said Russians are preparing to withdraw billions of euros from Cyprus.

"The Russians are already indicating they want to withdraw their money. Why should they stay? They will go somewhere where they can be protected; we can't protect them," Matsi said.

The controversial tax is seen hitting Russian pockets hard, with experts estimating that Russian deposits in Cypriot banks amount to at least 15.4 billion euros of the estimated 67 billion euros of deposits held by Cyprus banks.

Another economist, Castas Apostolides, said the Cypriot government went unprepared into negotiations with the eurogroup.

"We should have called Europe's bluff," he said.

"A bank haircut on deposits is unacceptable; they should have walked out because without a business sector there is no Cyprus economy," Apostolides said.

An analysis by IHS Global Insight said there was a "potential for contagion from the move to impact bank sectors in other troubled economies on the periphery of the euro zone."

"A mass of withdrawals from euro zone periphery banks could heat up the debt crisis once again after the international financial community had decided that lending to countries such as Spain and Italy would not require the extremely high risk premiums it had earlier demanded," it said.

"The financial markets' immediate bad reaction to the part funding of the Cypriot rescue by taxing bank depositors has highlighted the concerns that it could be opening a nasty can of worms," he added.-Reuters