The government's austerity measures have been greeted with mass protests
Cypriot MPs have rejected legislation demanded by international creditors in return for the second instalment of a 10bn-euro (£8.7bn) EU/IMF bailout.
Lawmakers voted 23 to 21 against two bills bringing co-operative banks under the central bank's direct supervision.
Cyprus has already received 3bn euros as part of the deal agreed in March.
The island has been in financial difficulties since the collapse of the Greek economy, where Cypriot banks had huge investments.
The Cypriot rescue package is aimed at the country's two largest banks, Bank of Cyprus and the now defunct Laiki.
It was signed with the troika of international lenders - the European Commission, European Central Bank and International Monetary Fund.
Unexpected voteObservers said Thursday's rejection of the legislation was unexpected. The bills are a requisite for the release of the next bailout instalment of 1.5bn euros.
Finance Minister Harris Georgiades reportedly rushed to the parliament in the capital Nicosia to meet party leaders and discuss the next steps.
Meanwhile, several hundred demonstrators gathered outside parliament in protest at the austerity measures.
The terms of the bailout have been controversial because they involve heavy losses for depositors with large balances in their accounts.
As part of the agreement, a one-time tax of 9.9% was imposed on people with more than 100,000 euros in their accounts.
The measures are designed to raise billions towards the bailout, but protect bank customers with smaller deposits.
In June, President Nicos Anastasiades urged eurozone leaders to revise the terms of the bank bailout, saying the "haircut" imposed on large deposits had significantly eroded the capital kept by businesses in banks.
Cyprus is the fifth country after Greece, the Republic of Ireland, Portugal and Spain to turn to the eurozone for financial help during the region's debt crisis.
The government's austerity measures also include the privatisation of a number of state-owned companies.
Source: BBC News - Business http://www.bbc.co.uk/news/world-europe-23981884#sa-ns_mchannel=rss&ns_source=PublicRSS20-sa
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