Despite that risk, Europe's biggest economy maintained a hard line on the negotiations. German Finance Minister Wolfgang Schaeuble said in an interview "if possible we want to avoid seeing Cyprus sliding into insolvency." But he cautioned that he is "known for not giving in to blackmail, by nobody and nothing."
Heading into the meeting of finance ministers in Brussels, Schaeuble said an agreement can be reached if Cyprus meets creditors' demands.
"I hope we can get to a result today. But that of course requires that the situation is viewed realistically in Cyprus," he said. "This is not about us - the decision lies with Cyprus."
"I'm expecting quite a long night," added Irish Finance Minister Michael Noonan. "I think a deal will be done tonight but I think it will be late, because a lot of detail has to be worked out."
A plan agreed to in marathon negotiations earlier this month called for a one-time levy on all bank depositors in Cypriot banks. But the proposal ignited fierce anger among Cypriots because it also targeted small savers. It failed to garner a single vote in the Cypriot Parliament.
The idea of some sort of deposit grab has also returned to the fore after Cyprus' attempt to gain Russian financial aid failed this past week, with deposits above 100,000 euros at Bank of Cyprus possibly facing a levy of up to 25 percent if the bank isn't restructured.
In an illustration of the depth of the fear of a banking collapse, Cyprus' central bank on Sunday imposed a daily withdrawal limit of 100 euros ($130) from ATMs of the country's two largest banks to prevent a bank run by depositors worried about their savings.
Cypriot banks have been closed this past week while officials have worked on a rescue plan and are not due to reopen until Tuesday. Cash has been available through ATMs, but many have run out quickly.
About 50 people protested outside the European Council building in Brussels where the finance ministers were meeting. They waved a Cypriot flag and a sign saying: "Enough is enough. Cyprus is not a second-class EU state."
Any agreement on a bailout package will have to be approved by the eurozone's finance ministers. Their decision might come only as a broad political agreement, with technical details to be hammered out in the coming days. But without an agreement in principle, the ECB is likely to pull the plug on Cyprus' banking system.
Cyprus already took significant steps toward cementing a new plan Friday night, when its lawmakers voted to restructure the banking sector, restrict financial transactions in emergencies and set up a "solidarity fund" that should act as the vehicle for raising funds from investments and contributions.
The restructuring and the sale of Greek branches of Cypriot banks are expected to significantly lower the 5.8 billion euros that the country needs to raise on its own to secure the rescue loans.