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Mystery Deepens: Has Cyprus Extended Capital Controls?

Nicosia, Cyprus
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Nicosia, Cyprus

Has Cyprus extended capital controls by another week? That's the mystery facing the market on Thursday.

According to Dow Jones, the country's central bank has in fact extended restrictions that prevent withdrawals above a certain size and electronic transfers.

"Capital controls have been extended for a week," Aliki Stylianou, a Cyprus central bank spokesperson, was quoted by Dow Jones as saying on Wednesday.

But when contacted by CNBC, the spokesperson was unable to confirm or deny the Dow Jones report.

Technically, capital controls are set to expire on Saturday, according to a decree issued on Wednesday on the Bank of Cyprus' website.

The longer the uncertainty continues, the worse things get for investors and the euro zone.

According to one strategist, the restrictions sound the death knell for the country's financial sector - and potentially, the euro.

"The longer the controls remain in force, then the more investors will start to lose faith in the concept of a "single currency" within the euro zone," Simon Derrick, chief currency strategist at BNY Mellon said in a research note on Thursday.

Capital controls were put in place to prevent a bank run when the country's banks reopened after protracted bailout negotiations.

(Read More: Will Cyprus Force Draghi to Finally Cut Rates?)

The country is in the midst of a restructuring of its main lenders, with healthy assets being transferred from the Popular (Laiki) Bank to the Bank of Cyprus.

Derrick warned the capital controls mean that a Cypriot euro is less valuable than a euro held in another country in the single currency zone.

"A depositor cannot use the euros sitting in a bank account in Nicosia in the same way that a depositor in, say, a bank in Frankfurt can. A euro held in Cyprus is therefore, for the moment at least, of less value than a euro held elsewhere in the euro zone banking system," he said.

The island's former finance minister, Michael Sarris, meanwhile, said on Wednesday that Cyprus faces a "very unfavorable" outlook in near term.

Sarris, who was central to a controversial bailout deal in which a levy was imposed on Cypriot bank deposits worth over 100,000 euros, resigned on Tuesday and said that bailout terms were a "seismic assault" on the economy.

Sarris said in an interview, according to Reuters, that Cyprus had made mistakes, but said international lenders had treated Cyprus unfairly.

"Clearly... mistakes were made - there was excessive growth in bank credit, in government spending. But I don't think it needed to come to this. I think this could have been corrected without this really seismic assault on the Cyprus economy," he said.

He added that it was "unfair" that Cyprus had been accused of money-laundering due to the large amount of Russian deposits in the island.

(Read More: Russia Loses Out as Cyprus Reaches Deal)

"They basically really accused us that we were sitting back and printing money, having a lot of foreign firms coming through Cyprus, offering them services and having a good time. I think that was unfair," Sarris said.

He said that signing the bailout deal was crucial for Cyprus as it removed a "protracted period of uncertainty which was killing the economy" but added that "the prospects for the economy in the next few months are really very, very unfavorable."

Derrick added that it was "clear" the island no longer had a future as an off-shore banking center. He highlighted that Cyprus's service sector, including the banking industry, accounted for around 80 percent of its gross domestic product prior to the crisis.

"With the country estimated to contract somewhere between 7.5 percent and 15 percent this year and youth unemployment already running at close to 30 percent the search for an alternative driver for the economy is now a matter of some urgency," he said.

-By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

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