A KEY ally of German Chancellor Merkel expressed reservations on Friday about bailing out Cyprus because wealthy Russians holding bank accounts on the island could prove the main beneficiaries.
Cyprus is in talks with international lenders on the terms of a bailout to total €10bn after its two largest banks incurred huge losses due to the Greek debt writedown earlier this year.
"We need to look very carefully at the situation. To be quite clear, I do not want to guarantee illegal Russian money," Volker Kauder, parliamentary floor leader of Merkel's Christian Democrats, told the online version of Der Spiegel magazine.
Last weekend, Spiegel reported that Germany's intelligence agency had prepared a report on money laundering in Cyprus that it said suggested "Russian oligarchs, businesspeople and mafiosi" would benefit most from any bailout.
Cyprus is a popular offshore tax haven for Russian businesses seeking protection from their country's unpredictable investment climate.
But Cyprus, which joined the European Union in 2004, says it has boosted its regulations over the past decade against money laundering and is in full conformity with international rules. It has dismissed the Spiegel report allegations.
Germany, the euro zone's largest economy, would provide more than €2bn towards the expected Cypriot bailout. But Germans are angry about having to stump up billions of euros to rescue Greece and other heavily indebted economies.
Meanwhile, European shares turned negative on Friday, led lower by growth-linked stocks as mounting concerns about a US fiscal crisis that could threaten growth in the world's biggest economy continued to weigh on sentiment.
Adding to that gloom were worries about Greece as it inches towards securing its next tranche of international aid.
At 0840 GMT, the FTSEurofirst 300 index of top European shares was down 0.1pc at 1,096.74 points, recording a third straight day of losses.
European insurers fell 0.9pc, while miners fell 0.7pc.