Cyprus, the fifth eurozone country to seek emergency funding from Europe, may need a bailout that is more than half as big as its 17.3bn euro economy, according to officials.
The Mediterranean island, with a banking sector heavily exposed to debt-crippled Greece, said on Monday it was formally applying for help from the European Union's rescue funds.
Cyprus is the eurozone's third smallest economy but it joins Greece, Ireland, Portugal and Spain in seeking EU rescue funds to try to stay afloat, in the latest sign that policymakers have failed to prevent the debt crisis from spreading.
European leaders will meet at a summit on Thursday and Friday but they are not expected to come up with a lasting solution to the region's problems, which have also sent Italy's borrowing costs soaring.
Work on determining exactly how much aid Cyprus needs will start next week when officials from the European Commission and the European Central Bank - and probably the IMF too - travel to Nicosia, one source involved in the plan told Reuters news agency.
Two eurozone country officials said that a package of up to 10bn euros was being considered.
"The exact number has not been decided yet. It was to be 6bn for the state financing and 2bn for the banks but that is optimistic - it is more likely to be seven and three - up to 10bn euros in total," one eurozone official said.
Speaking to Al Jazeera, Stavros Zenios, a financial analyst in the capital Nicosia, said that the 10bn number is likely "exaggerated."
"It’s the number that will be required [if] Greece exits the eurom, in which case the Cypriot banks will suffer another hit. I believe that is a very remote scenario and not the one we have to deal with right now," Zenios said.
He said the situation is "manageable," but that it will take "drastic reforms of the public sector".
Cyprus is struggling to find about 1.8bn euros ($2.26bn) - or about 10 per cent of its gross domestic product - by a June 30 deadline to recapitalise its second largest lender, Cyprus Popular Bank.
The lender is the most heavily exposed of the country's banks to Greek government debt, which lost most of its value this year in a writedown.
Over the past weeks it became clear that the bank would not find the money from the private sector and would need to get it from the government, itself strapped for cash and unable to raise money in bond markets, where its borrowing rates are too high.
In another development, Greece named Yannis Stournaras, an economist, on Tuesday as the new finance minister amid increasing uncertainty about the country’s government following national elections earlier this month.
Stournaras was appointed to the position after the sudden resignation of the first choice for the job at a crucial moment for the debt-laden country.
The new conservative-led government scrambled to make a quick decision on the post after banker Vassilis Rapanos quit on Monday on the advice of doctors after spending four days in hospital with dizziness and abdominal pains.
His sudden resignation threw the government into confusion at a time when it faces the daunting task of trying to persuade sceptical international lenders to ease the harsh terms of a bailout that has enraged the population.
Stournaras' appointment comes as Antonis Samaras, Greece's prime minister, considers a European tour to seek changes to his country's bailout deal as soon as he recovers from eye surgery, according to a government official.
"As soon as his doctors give him the go-ahead, he plans a European tour in which he will definitely go to Berlin, Paris and Brussels," the official told Reuters on condition of anonymity on Tuesday.
Earlier on Tuesday, Samaras talked on the phone to German Chancellor Angela Merkel, who invited him to Berlin after his election victory on June 17. Samaras had the surgery on Saturday to repair a damaged retina and will miss an EU-summit later this week.