The financial future of Cyprus is in turmoil after the country's parliament voted down plans to impose a levy on savers' bank deposits that were imposed by the EU as part of its bailout conditions.
None of the country's MPs voted for the tax on Tuesday while 36 voted against and 19 abstained.
Protesters had demonstrated outside the Cypriot parliament ahead of the vote
The Cypriot government planned to impose the levy to secure an international rescue of the country's troubled banks and had even modified the proposals in the face of fierce opposition by exempting savers with smaller deposits.
Those with than €20,000 (£17,000) were exempt from the levy while those with more than €100,000 would be charged at 9.9%, but that still wasn't enough for parliament.
President Nicos Anastasiades had earlier said he expected MPs to reject the tax, saying: "They feel and they think that it is unjust and it's against the interests of Cyprus at large."
He has now called an emergency meeting of party leaders for Wednesday morning to discuss the way ahead.
"The voice of the people was heard," said Andreas Miltiadou, a 65-year-old pensioner among the demonstrators.
EU ministers and officials have insisted that €5.8 billion (£4.9 billion) of the €15.8b (£13.5bn) rescue package must be raised by Cyprus.
Unlike the previous rescues for Greece, Portugal, Ireland, and Spanish banks, the proposed Cypriot bailout was the first that dipped into people's bank accounts to finance the measures.
There were suggestions that eurozone leaders, particularly in Germany, insisted on the levy because of the large amount of Russian capital kept in Cypriot banks, amid fears of money-laundering.
Fearing a run on accounts, Cyprus has closed all its banks until Thursday at the earliest. The local stock exchange also remains closed.
Britain's MEPs had condemned the Cyprus bailout agreement, with Peter Skinner, Labour MEP for the South East, saying it could be dangerous as a precedent.
Stock markets fell earlier in the week amid fears the move could spark another financial crisis in the eurozone.
The news came after the British government sent a plane carrying €1 million (£852,600) to the country as a "contingency measure" to help troops and their families.
The Ministry of Defence (MoD) said the RAF flight, which landed in Cyprus on Tuesday evening, would provide people with emergency loans in the event that cash machines and debit cards stop working completely.
The MoD said it is determined to minimise the impact of the Cyprus banking crisis on "our people" and it will consider further shipments if required.