ECB's Draghi, German finance minister at odds over Cyprus: Spiegel

BERLIN (Reuters) - The head of the European Central Bank (ECB) has clashed with Germany's finance minister over Cyprus, arguing that failure to bail out the tiny island nation could endanger the wider euro zone, the weekly Spiegel magazine reported on Sunday.

Cyprus is seeking financial aid after an EU-approved writedown of Greek debt imposed huge losses on its banks. However, Germany and some other euro zone states are uneasy about bailing out a country they say lacks financial transparency.

Last week, ECB president Mario Draghi rebuffed German Finance Minister Wolfgang Schaeuble's view that Cyprus is not "systemically relevant" and that its bankruptcy would not pose a threat to the survival of the euro zone, Spiegel reported without citing sources for its report.

Draghi told Schaeuble during a gathering of euro zone finance ministers that Cyprus's two largest banks have an extensive network of branches in Greece and that customers' worries over the safety of their deposits could quickly wreck a fragile calm that has returned to that crisis-ridden country.

Schaeuble has repeatedly argued that it is not yet clear whether "the problems in Cyprus could be a danger to the euro zone as a whole".

German Chancellor Angela Merkel has urged Cyprus to embrace economic reforms and fully implement laws against money laundering, but has also said Europe must show "solidarity", apparently giving conditional support for a bailout.

Spiegel, which gave no sources, reported European Economic Affairs Commissioner Olli Rehn and the chief of the euro zone's bailout fund, Klaus Regling, had sided with Draghi against Schaeuble on the issue of aid for Cyprus.

"A Cypriot bankruptcy would undo the positive news which has recently led to a calming of the mood in the euro zone," Spiegel quoted Draghi and his colleagues as telling Schaeuble.

ECB board member Joerg Asmussen also warned last week that problems in Cyprus could derail confidence in the euro zone, even though the island accounts for just 0.2 percent of the currency bloc's entire output.

Cyprus is a popular tax haven for wealthy Russians. It denies allegations that it is a hub for money laundering.

Preliminary estimates of a draft bailout deal for Cyprus put the bill at 10 billion euros for bank support. On that basis, its total bailout, including fiscal needs, could reach 17-17.5 billion euros, equivalent to Cyprus's annual economic output.

Asmussen said he believed a bailout deal was possible at the end of March, after Cypriot elections on February 17.

(Reporting by Gareth Jones; Editing by Alison Birrane)