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George Osborne: "People who are doing their duty for our country in Cyprus will be protected from this Cypriot bank tax"
The UK will compensate any British troops in Cyprus hit by plans to introduce a bank levy as part of a £9bn EU bailout, the chancellor has said.
British government workers would also be protected, George Osborne said.
Under the bailout, account holders in Cyprus with up to 100,000 euros would pay a one-off levy of 6.75%; higher deposits would suffer a 9.9% levy.
The move could affect many of the 3,000 UK military personnel in Cyprus, and tens of thousands of expatriates.
An emergency session to discuss the 10bn-euro ($13bn; £9bn) deal agreed by the EU and IMF on Friday is to take place on Monday.
The debate and a presidential address were to happen on Sunday but were postponed, state media said.
'Disorderly bankruptcy'Residents have been queuing outside banks to withdraw their savings from cash machines.
Mr Osborne told the BBC's Andrew Marr programme: "For people serving in our military and serving our government we are going to compensate anyone affected by this bank tax; people who are doing their duty for our country in Cyprus will be protected from this Cypriot bank tax."
He added: "Anyone who thinks Britain is alone in having these challenges should look on their TV screens, look at tonight's news, realise that it's a very tough economic situation out there."
A Ministry of Defence spokesman said there were around 3,000 British military personnel in Cyprus, but he did not know as yet how many were affected.
"British troops in the region can choose to have part or all of their salary paid locally," he said.
On Saturday President Nicos Anastasiades admitted the deal was "painful" but said it was necessary to avoid a "disorderly bankruptcy".
However, his Democratic Rally party - which has 20 seats in the 56-member assembly - needs support from other factions to ratify the bailout.
End Quote Fiona Mullen Economist living in CyprusThe worst thing here is is that they could have put a threshold on it for the very poorest but they didn't and that's the saddest thing."
Sharon Bowles, the chairwoman of the European Parliament's Economic and Monetary Affairs Committee and MEP for South East England, said she was appalled by the plans.
"This grabbing of ordinary depositors' money is billed as a tax, so as to try and circumvent the EU's deposit guarantee laws. It robs smaller investors of the protection they were promised."
British expatriate Parker Williams, one of the 25,000 UK citizens living in Cyprus, said there was a lot of confusion amongst the Britons.
"Personally I'm not worried about it as a lot of people could see it coming and have already taken the necessary precautions with their money."
'Plans unexpected'Mr Williams runs the Cyprus Expat website and lives in the country's second largest city of Limassol.
He said the timing of these plans were terrible as a carnival was under way in the city on Sunday, and a religious festival on Monday.
"There might be some protests," he said. "As well as the fact ATMs will at some point dry up and people will not be able to get access to their money.
"It will definitely put people off coming here which will also affect our economy."
But Fiona Mullen, an economist living on the island, told BBC News the plans were unexpected.
"We knew there was a possibility they would take the deposits above the insured threshold - so above 100,000 euros - but nobody thought they would take it down to someone with five euros in the bank.
"I was trying to take money out of the ATM [on Saturday] but I couldn't."
She said a man got very close to bulldozing a bank in Cyprus on Saturday in protest against the plans.
"Cypriots are not like the Greeks, it takes a lot to get them out onto the streets but residents are very annoyed."
Ms Mullen said she was fearful of doing the calculations on her own savings.
"I'm a small business and cash flow is always an issue, but the worst thing here is is that they could have put a threshold on it for the very poorest but they didn't and that's the saddest thing."
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