Euro zone bailout fund says Cyprus a potential contagion risk

PARIS (Reuters) - Cyprus's debt crisis risks spreading to other euro zone countries, the head of the euro zone's bailout fund said in a newspaper interview, urging a rapid decision on aid for the Mediterranean island country.

With Italy facing elections in the coming days, it represents a source of uncertainty although the euro zone has the means to cover its borrowing needs, Klaus Regling said in an interview with French daily Le Figaro.

Euro zone finance ministers have put off thrashing out an international bailout for Cyprus until next month ahead of a presidential election which culminates with a runoff on Sunday.

Cyprus needs a bailout of around 17 billion euros -- almost the size of its gross domestic product -- mainly because of the devastating effect the sovereign Greek debt restructuring had on the oversized Cypriot banking sector.

"We need a decision soon or otherwise it represents a risk for the euro zone," Regling, the head of the European Stability Mechanism, said.

Rating agency Standard & Poor's said on Wednesday Cyprus faces a "material and rising risk" of defaulting on its sovereign debt, especially if the euro zone and International Monetary Fund do not come up with aid.

Among other risks looming over the euro zone, Regling said Italy could become a "subject of uncertainty" if reforms are not pursued in the country.

"The reforms put in place by the outgoing government were crucial. We hope that the government that is put in place after the elections will keep up the reforms," he said.

With 90 percent of the ESM's 500 billion euro lending capacity still available, Regling said that Italy's borrowing needs could be covered for up to nearly two years if needed.

Moreover, the European Central Bank also stood ready to provide unlimited support for Italy if it decided to intervene in a bailout with the ESM and on condition reforms were carried out, Regling said.

(Reporting by Leigh Thomas; Editing by Jason Webb)