The two sides launched talks last September aimed at reunifying Cyprus, divided along ethnic lines since 1974 when Turkey invaded in response to a brief Greek-inspired coup. Diplomats want a deal before a Turkish Cypriot election next year expected to bring hardliners to power.
The International Crisis Group (ICG) urged Turkish Cypriot leader Mehmet Ali Talat and President Demetris Christofias, the Greek Cypriot leader, to speed up peace talks on creating a bi-zonal, bi-communal federation and to put a final settlement to referenda in their communities in early 2010.
"Failure will mean an indefinite partition, leading to more strains in EU-Turkey relations, new frictions in the east Mediterranean, less EU-NATO cooperation, acceleration of the centrifugal forces scattering the Turkish Cypriots and new risks to the prosperity and security of Greek Cypriots," it said in a report.
The ICG also said the European Union must "rapidly engage in support of the process" and called on the EU, the United States and Russia to organise a donor conference to commit financial support for a settlement.
The conflict is complicating predominantly Muslim Turkey's hopes of joining the 27-member EU. The island is represented in the EU by the Greek Cypriots who will obstruct Turkish entry so long as Cyprus is divided.
The ICG report said Greek Cypriots, who rejected a UN-backed referendum in 2004 on reunification that was approved by Turkish Cypriots, have much to lose from partition despite being the part of the island that joined the EU.
"They would lose further from the indefinite presence of Turkish troops on the island, the much-reduced likelihood of the return or compensation for occupied property, the alienation of Turkey from the EU, possible moves to withdraw UN peacekeepers and a greater risk that some countries would recognise Turkish Cypriot independence," it said.
For Turkish Cypriots, the ICG said, partition would mean "ever-deeper fiscal dependence from Turkey, renewed inflow of poorer, less-educated immigrants and outflow of the original population to Istanbul, Europe and the Greek Cypriot zone".
As for Turkey, loss of the prospect of EU membership would deprive the country of its main locomotive for modernisation and would likely reduce foreign investment and economic growth, it added.
The ICG said that, if a strong new government emerged from the Greek parliamentary election on 4 October, Greek leaders "might engage with the Cyprus question again," a development that could ease Turkish-Greek tension.
"Neither Christofias nor Talat has any desire to walk away from the negotiating table. The danger is that they will simply run out of time," it said.(EurActiv with Reuters.)