ECB's Nowotny says expects no Cyprus contagion risk: paper

European Central Bank policymaker Ewald Nowotny does not expect euro zone member Cyprus's economic woes to spread, he told a newspaper.

He said Cyprus was a "special case" due to its outsized financial sector fuelled by foreign investors, in an interview with Austrian paper Oesterreich conducted on Tuesday and published on Sunday.

"This system is certainly no longer able to continue," said Nowotny, the head of Austria's central bank.

Asked how dangerous the Cyprus crisis was for Europe's financial markets as the country scrambles to secure a bailout deal with international lenders, he said that Cyprus accounted for only 0.2 percent of the euro zone's economic output.

"We see clear signs of improvement in Spain, Portugal and Ireland. I see no massive economic problems in Italy as well, so I do not believe that it will come to contagion," he said.

Cypriot President Nicos Anastasiades was due in Brussels on Sunday to seek an 11th-hour reprieve from financial meltdown, with a bailout from the European Union and the island's place in Europe's single currency bloc hanging in the balance.

Nowotny ruled out the idea that officials could tax deposits in Austria, a plan being considered in Cyprus. "Austrian savers' money is absolutely safe," he said.

Asked when savers could expect higher interest rates, he said: "When economic developments improve, but we expect the rate of inflation to fall in 2013 so real returns will improve."

Nowotny said the Austrian economy would expand by around 1 percent this year, well above the average in the euro area, then growth would accelerate to 1.7-1.8 percent in 2014.

That is in line with the latest forecasts last week from Austria's main economic think-tanks.

(Reporting by Michael Shields; Editing by Pravin Char)