Cyprus ' political party leaders meet Friday, seeking to hammer out an emergency austerity package to ease market fears that an escalating economic crisis and exposure to Greek banks could see the island nation added to the list of euro zone bailouts.

Heads of Cyprus ' six main political parties gathered for a meeting at the Presidential palace at 0800 GMT in Nicosia and are expected to pass a raft of measures to curb public spending and ease pressure on Cyprus ' 5.1% budget deficit. The negotiations appeared to be characterized by broad agreement, but local media reported Friday that bi-partisan consensus had frayed after opposition lawmakers criticized the ruling center-left party's refusal to enact sweeping structural reforms.

Euro-zone leaders' sweeping EUR109 billion ($157 billion) bailout for Greece and new steps to prevent its debt crisis infecting the Continent may have given the markets some respite, but investors will be watching Cyprus' meetings closely.

Cypriot policy makers are grappling with an intensifying economic crisis aggravated by a deadly July 11 explosion that shuttered the island's main power plant and spawned almost two weeks of rolling electricity blackouts at the height of the tourism season. The disaster, which resulted in 13 deaths, has spurred a political crisis, prompting calls for President Christofias to resign. The foreign and defence ministers have quit after a confiscated cache of Iranian weapons exploded at a naval base, knocking out the 830-megawatt Vassiliko power plant.

But the impact is also being felt across the economy: power outages have curbed productivity as businesses and families have gone without electricity and air conditioning amid a mid-summer heatwave. Although Cyprus' public finances are in significantly better shape than the bailed out economies of Greece, Ireland and Portugal, the cost of repairing the electricity grid, which is forecast at EUR1 billion, or 5.6% of gross domestic product, will significantly deteriorate the island's fiscal position.

Cypriot central bank Governor Athanasios Orphanides warned this week in a leaked letter to President Demetris Christofias that the explosion had plunged the economy into a "state of emergency, comparable to that of 1974," which could force the island to seek a bailout from Brussels .

Turkish troops invaded the island in 1974 and have since occupied one-third of its territory. Cyprus is divided between Greek-Cypriot and Turkish-Cypriot sectors.

The crisis has aggravated Cyprus ' existing economic difficulties; bond yields have been rising sharply in recent months, underlining investor concerns about the financial and commercial sectors' high exposure to Greece .

Analysts said politicians needed to deliver a sweeping reform package if Cyprus was to restore market confidence and ease mounting public discontent.

"My understanding is that measures will be taken and that will be welcome - but I'm not sure they will be tough enough to take us out of this crisis… we really need a paradigm shift, shrinking the public sector if we are to get through," said Andreas Theophanous, Professor of political science at the University of Nicosia.

Ratings agencies have indicated in recent months that policy makers need to take serious action to mitigate exposure to Greek debt.

In May, Moody's Investor Services put Cyprus ' investment-grade ratings on review for a possible downgrade, citing the banking sector's large exposure to Greek debt and significant lending to that nation's private sector.

The credit-ratings company has the economy's ratings at A2 - five notches above junk territory - following a two-notch downgrade in February. Moody's said it will consider the potential bank support package that Cyprus may need to extend if Greek sovereign debt is restructured, as well as other possible sources of assistance such as the European Central Bank.

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