Merkel says Cyprus aid talks to take time, German MPs uneasy

German Chancellor and Christian Democratic Union (CDU) party leader Angela Merkel delivers her speech during an election campaign with Lower Saxony's state governor and top candidate of the CDU in the federal state elections David McAllister (not pictured) in Brunswick, January 5, 2013. State elections in Lower Saxony will be held on January 20.

BERLIN (Reuters) - German Chancellor Angela Merkel said on Wednesday she expected talks on a bailout deal for Cyprus to take time, while a senior member of her coalition said parliament was not yet ready to approve any financial aid.

Cyprus, whose economic woes stem from its banks' heavy exposure to crisis-racked Greece, requested financial help from the European Union and the International Monetary Fund last June. It is not yet clear when the aid will be finalized.

Merkel said that there would be no special conditions for Cyprus and that it would be expected to pursue deep reforms including privatizations in return for aid. The Mediterranean island's outgoing communist president is opposed to selloffs.

"We are far from the end of the talks," Merkel told a news conference.

"It is important that the troika (of international lenders) should talk with Cyprus and that there can be no special conditions for Cyprus because we have common rules in Europe," she said.

German media have in the past criticized Cyprus's status as a popular tax haven for wealthy Russians and expressed unease about bailing out the island's banks - an issue taken up by two senior lawmakers in comments published on Wednesday.

"There are many question marks regarding Cyprus. On the basis of what we know so far I do not see a majority (in the lower house Bundestag) for financial aid," Rainer Bruederle, parliamentary leader of Merkel's junior coalition partner, the Free Democrats, told the Bild newspaper.

"If the impression exists that German taxpayers are to be liable for dirty money, the aid would not be manageable or acceptable," Bruederle added.

Cyprus says it is in full conformity with international rules against money laundering.

POLITICAL OPPOSITION

Bruederle's comments came after the German opposition Social Democrats (SPD), who up to now have always supported Merkel's euro zone policy in parliamentary votes, said they could not support a bailout for the island at the present time due to concerns over money laundering.

Merkel would need SPD votes to secure German parliamentary backing for a Cypriot bailout, which could total up to 17.5 billion euros ($22.6 billion), equal to the island's entire gross domestic product.

The centre-left SPD, which hopes to oust conservative Merkel in German elections due in September, has taken a hard line on tax evasion, including by wealthy Germans who squirrel away cash in Swiss bank accounts.

In Nicosia, Cypriot officials declined to speculate on Wednesday about when a bailout deal could be concluded, saying it depended on the results of a recapitalization assessment of the Cypriot banking system that is expected around January 15.

A preliminary bailout accord between Cyprus and lenders leaves open the possibility of privatizations but only if debt levels are unsustainable.

The head of euro zone finance ministers, Jean-Claude Juncker, said last month the ministers would discuss a deal for Cyprus at their next meeting on January 21.

German newspaper Handelsblatt, citing sources close to the negotiations, said on Wednesday that no deal would come before early March. Cyprus will hold a presidential election on February 17, with a possible runoff set for February 24.

Handelsblatt said euro zone finance ministers prefer to wait to work with the successor of President Demetris Christofias, a communist who is not seeking re-election. (Additional reporting by Stephen Brown in Berlin and Michele Kambas in Nicosia, editing by Gareth Jones and Hugh Lawson)