UPDATE 1-Cyprus may struggle with December payroll -finmin

* Leaked minutes show finmin concerned over Dec. public salaries

* Also worried that EU peers could financially ``butcher'' island

* Island sought aid in June

NICOSIA, Oct 30 (Reuters) - Cyprus may struggle to pay public sector salaries in December unless a bailout deal is clinched by mid-November, an official document quoted Finance Minister Vassos Shiarly as saying.

The confidential minutes of an Oct. 3 meeting in parliament quoted Shiarly as saying Cyprus might be ``butchered'' if international lenders dealt with the small country in isolation from other euro zone states that need financial aid.

The minutes, reported in the Politis daily on Tuesday and seen by Reuters, illustrated growing unease at delays in meeting financial aid needs which the troika of international lenders has put at up to 16 billion euros ($20.65 billion).

Cyprus, shut out of international capital markets for more than a year, was forced to turn to its EU peers for help after its two largest banks took overwhelming losses on a writedown of Greek sovereign debt earlier in 2012.

Meeting December's payroll commitments was contingent on the goodwill of bankers, the minutes quoted Shiarly as saying.

Shiarly said that if a deal were agreed, Cyprus could get a first instalment of aid by Dec. 24. Asked if Cyprus would manage until December, he said: ``If needs be. We will have difficulties, but nothing can be absolute.

''I can't make predictions from now, because no banker would undertake a commitment on financing, even when times were good. I'm just saying it's manageable.``

He also cited disagreements between Cyprus and lenders on the recapitalisation requirements of its banks. Lenders believe Cyprus needs 10 billion euros for banks alone, while Cypriot authorities put the total closer to 5 billion euros, Shiarly said.

Cyprus sought financial aid from the European Union and the International Monetary Fund in June, but the cash-starved island has still not concluded a bailout deal with lenders.

The minutes show Cypriot authorities clearly under-estimated the complexities of the process.

A deal should have been in place by Oct. 20 to put the issue on the agenda of the Nov. 12 meeting of euro zone finance ministers in Brussels, Shiarly told the lawmakers.

But Cyprus in fact only signalled it was ready to delve deep into a final round of talks last week, after preparing what it said were its own ''counter-proposals`` to an austerity package prepared by lenders in July.

It has since been waiting for the arrival of a team from the troika, comprising the European Commission, IMF and European Central Bank.

A government source told Reuters they believed a deal was close.

''I'm optimistic any differences can easily and swiftly be resolved,`` Shiarly told reporters in a brief comment on Tuesday. He was not asked about the Oct. 3 briefing but said the troika would possible come to Cyprus early next week.


At the parliamentary hearing, one lawmaker said Cyprus's aid needs should be discussed at the same time as those of Spain and Greece because, if isolated, ''Germany and Finland will tear us to pieces``.

Responding to this at the time, Shiarly said:

''Yes. That is precisely their approach. Our case is indeed difficult, because some have very negative positions concerning Cyprus ... I'm inclined to believe that if we go on our own, naturally they will butcher us.``

Cyprus accounts for about 0.2 percent of the euro zone's economy but its bailout could be proportionately huge.

If troika assessments are verified, the island would need 16 billion euros - 10 billion for its banks and 6 billion for its fiscal requirements. Cypriot assessments put the total at 11 billion euros.

The island's debt to GDP ratio is already hovering at about 83 percent.

The island of one million people frequently falls under the radar, a fact authorities were clearly hoping it could turn to its advantage with a less-than-strenuous grilling from EU peers.

In the minutes of the discussion, Shiarly relates cases of some European finance ministers getting testy with Cyprus even though it was 2.30 a.m. and they were ''exhausted`` after spending hours on Greece and Spain.

''Imagine what will happen if we go completely on our own,`` he was quoted as saying.