from the Guardian today -

Fears were growing last night for Iceland's financial system, following a tumultuous week in which the government seized control of Glitnir, the country's third biggest bank. The krona has slumped another 14% since the government agreed to pump €600m (£467m) into Glitnir on Monday, as confidence in Iceland has evaporated.

Gylfi Magnússon, an economist at the University of Iceland, said the government would need to take further "drastic action" to prevent the banking system from collapsing. He said it was "inevitable" more firms would run into trouble. "This past week has been about as bad as it could get," he said. "People are very worried and have no real idea what the future might look like".

The combined assets of Iceland's big three banks are nine times the country's GDP. The government and central bank "don't have the money to keep the banks afloat", Magnússon said. The cost of insuring Iceland's government and bank debt has soared to record levels, suggesting the credit markets believe a default is imminent. Iceland has been likened to the canary in the coal mine, a small economy, but if it topples it is an ominous sign for the rest of the world.

The head of the Icelandic central bank, Davíd Oddsson said officials were examining various options to calm the crisis, including a large loan from overseas. Sources said the two largest banks, Kaupthing and Landsbanki, were in constant touch with government officials.

Kaupthing was fighting rumours about its health after reports it had been cutting its exposure to the markets. In a statement, Armann Thorvaldsson, who runs the London office said; "In these extreme market conditions, everyone across the market is looking to deleverage - it's the sensible thing to do." The bank said it has ample funding for the next 12 months. Kaupthing and Landsbanki have built their deposit bases, partly with UK savers' cash (protected by the British government guarantee).

Iceland, which has been likened to a "toxic hedge fund", has been one of the fastest growing economies in Europe but the wealth has been built largely on borrowing, the big three banks rely heavily on the wholesale markets to fund their expansion. As the credit markets have frozen, the banks are finding it difficult to find short-term financing.

One of Iceland's best known firms, Baugur, owns many British high street stores, including House of Fraser, Karen Millen, Oasis and All Saints. It issued a statement yesterday distancing itself from the situation in Iceland, noting that most of the funding for its retail business was through international banks.