A European Union spokesperson say Cyprus has reached a tentative deal with international lenders for a €10 billion bailout.
The deal would involve shutting down its second largest bank and would inflict heavy losses on uninsured depositors.
It emerged after fraught negotiations between Cypriot president Nicos Anastasiades and heads of the EU, the European Central Bank and the International Monetary Fund in Brussels.
It came just hours before a deadline to avert a collapse of the island's banking system.
The draft proposal, which still has to be approved by Eurozone finance ministers, would wind down the Popular Bank of Cyprus, also known as Laiki, and shift deposits below €100,000 to the Bank of Cyprus to create a "good bank".
Deposits of less than €100,000 are to remain secure, with no levies imposed.
But deposits above €100,000, which under EU law are not guaranteed, would be frozen and used to resolve debts. Depositors could lose as much as 40% of their money.
At the insistence of the IMF, the deal will not be put to a vote in the Cypriot parliament.
Cypriot finance minister Michalis Sarris says the deal puts an end to three years of uncertainty. He says his country has avoided a disastrous exit from the Eurozone.
The president of the Eurogroup of Eurozone finance ministers, Jeroen Dijsselbloem, told a news conference in Brussels the deal puts an end to the uncertainty about Cyprus's economy.
He says he is convinced the new deal was better for the Cypriot people than the broader measure rejected by the Cypriot parliament last week.
Squeeze on ATM withdrawals
Earlier, the Bank of Cyprus - the country's biggest lender - further limited cash machine withdrawals to €120 a day.
With queues growing outside automatic teller machines across the island, Laiki also lowered its daily limit - to €100. The previous limit was €260 a day.
Banks have been closed since Monday 18 March and many businesses are only taking payment in cash.
Cyprus needs to raise €5.8 billion to qualify for a €10 billion EU bailout and avoid bankruptcy.
