The savings converted to bank shares would theoretically allow depositors to eventually recover their losses. But the shares now hold little value and it's uncertain when -- if ever -- the shares will regain a value equal to the depositors' losses.
Emergency laws passed last week empower Cypriot authorities to take these actions.
Cyprus' Finance Minister Michalis Sarris said the measures were taken to put the Bank of Cyprus on a solid footing.
"We suffered a serious blow without doubt ... but we now have a bank which is reformed and ready to assume its role in the Cypriot economy," the state-run Cyprus News Agency quoting him as saying.
Analysts said Saturday that imposing bigger losses on Bank of Cyprus customers could further squeeze already crippled businesses as Cyprus tries to rebuild its banking sector in exchange for the international rescue package.
(Read More: Cyprus Bank Controls to Last a Month: Minister)
Sofronis Clerides, an economics professor at the University of Cyprus, said: "Most of the damage will be done to businesses which had their money in the bank" to pay suppliers and employees. "There's quite a difference between a 30 percent loss and a 60 percent loss." With businesses shrinking, Cyprus could be dragged down into an even deeper recession, he said.
Clerides accused some of the 17 European countries that use the euro of wanting to see the end of Cyprus as an international financial services center and to send the message that European taxpayers will no longer shoulder the burden of bailing out problem banks.
But German Finance Minister Wolfgang Schaeuble challenged that notion, insisting in an interview with the Bild daily published Saturday that "Cyprus is and remains a special, isolated case" and doesn't point the way for future European rescue programs.
Europe has demanded that big depositors in Cyprus' two largest banks -- Bank of Cyprus and Laiki Bank -- accept across-the-board losses in order to pay for the nation's 16 billion euro ($20.5 billion) bailout. All deposits of up to 100,000 are safe, meaning that a saver with 500,000 euros in the bank will only suffer losses on the remaining 400,000 euros.
Cypriot officials had previously said that large savers at Laiki -- which will be absorbed in to the Bank of Cyprus -- could lose as much as 80 percent. But they had said large accounts at the Bank of Cyprus would lose only 30 to 40 percent.
Asked about Saturday's announcement, University of Cyprus political scientist Antonis Ellinas predicted that unemployment, currently at 15 percent, will "probably go through the roof" over the next few years.
"It means that (people) ... have to accept a major haircut to their way of life and their standard of living. The social impact is yet to be realized, but they will be enormous in terms of social unrest and radical social phenomenon," Ellinas said.
There's also concern that large depositors -- including many wealthy Russians -- will take their money and run once capital restrictions that Cypriot authorities have imposed on bank transactions to prevent such a possibility are lifted in about a month.
Sarris, the finance minister, said that foreign branches of the Bank of Cyprus and Laiki Bank in countries such as Britain, Russia, Ukraine and Romania will eventually be sold. He also said that Cypriots would seek out new markets like China and the Arab countries while maintaining good business relations with Russians, "despite their bitterness."
Cyprus agreed on Monday to make bank depositors with accounts over 100,000 euros contribute to the financial rescue in order to secure 10 billion euros ($12.9 billion) in loans from the eurozone and the International Monetary Fund. Cyprus needed to scrounge up 5.8 billion euros ($7.4 billion) on its own in order to clinch the larger package, and banks had remained shut for nearly two weeks until politicians hammered out a deal, opening again on Thursday.
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But fearing that savers would rush to pull their money out in mass once banks reopened, Cypriot authorities imposed a raft of restrictions, including daily withdrawal limits of 300 euros ($384) for individuals and 5,000 euros for businesses -- the first so-called capital controls that any country has applied in the eurozone's 14-year history.
The rush didn't materialize as Cypriots appeared to take the measures in stride, lining up patiently to do their business and defying dire predictions of scenes of pandemonium.
Under the terms of the bailout deal, the country' second largest bank, Laiki -- which sustained the most damaged from bad Greek debt and loans -- is to be split up, with its nonperforming loans and toxic assets going into a "bad bank." The healthy side will be absorbed into the Bank of Cyprus.
On Saturday, economist Stelios Platis called the rescue plan "completely mistaken" and criticized Cyprus' euro partners for insisting on foisting Laiki's troubles on the Bank of Cyprus.