For such a little country Iceland sure is powerful!

REYKJAVIK, Iceland (AP) -- Iceland plunged further into financial crisis on Wednesday as it scrapped plans to nationalize a major bank, instead placing it into receivership, and abandoned attempts to put a floor under its falling currency by fixing the exchange rate.

Adding to Iceland's woes, the British government said that it planned to sue over lost deposits held by tens of thousands of Britons with Icelandic bank accounts.

The global credit crisis has exacted a heavy toll on Iceland, where the banking sector dwarfs the rest of the economy thanks to a stock market boom in the mid-1990s.

Those heavily exposed banks are now putting the entire country at risk, with Prime Minister Geir H. Haarde warning of "national bankruptcy."

The struggle of the government to deal with its top-heavy banking system was highlighted by a decision to place Glitnir, the country's third-largest bank, into receivership under the Icelandic Supervisory Authority. The decision came less than two weeks after the government announced it was taking a 75 percent stake in the bank for 600 million euros ($820 million). Central bank governor David Oddsson told TV station RUV late Tuesday that the "difficulties of the bank were much greater" than previously estimated.

The move into receivership gives Glitnir temporary protection from its debt obligations.

A receivership committee appointed by the regulator has replaced Glitnir's board and immediately began restructuring the bank with announcements that it plans to sell its Finnish and Swedish businesses.

Meanwhile, the Icelandic central bank, Sedlabanki, said it was giving up attempts to peg its currency to stop the kronur free-falling.

The bank had temporarily fixed the exchange rate of the krona at a level equal to 131 krona against the euro - on Tuesday morning.

Earlier Wednesday, it made a plea that "market makers in the interbank market support its attempts to strengthen the krona," which went unheeded.

"It is clear that there is insufficient support for this exchange rate; therefore, the Bank will not make any further such efforts for the time being," it said in a statement.

In Britain, Prime Minister Gordon Brown said that the government will take legal action to recover deposits belonging to 300,000 British account holders with the Icesave Internet bank after its parent, Landsbanki, was placed in receivership.

British savers have deposited millions of pounds in accounts through the collapsed Landsbanki's Internet operation, Icesave, which has suspended withdrawals.

British Treasury chief Alistair Darling said the British government would also guarantee all customer deposits at Icesave, even if they were above Britain's standard 50,000 pound ($88,000) protection plan because Iceland was refusing to meet its guarantees.

"The Icelandic government, believe it or not, have told me yesterday they have no intention of honoring their obligations here," Darling told the British Broadcasting Corp.

Darling added that savings bank ING Direct UK had agreed to buy more than 3 billion pounds ($5.3 billion) of deposits held by around 180,000 British savers with two other Icelandic-owned banks, Kaupthing Edge and Heritable Bank, which is owned by Landsbanki.

The speed of Iceland's downfall in the week since it announced it was nationalizing Glitnir bank caught many by surprise, despite warnings the country was the "canary in the coal mine" of the global credit squeeze.

Haarde, who has complained of a lack of support from other European nations, has sought a 4 billion-euro (5.47 billion) loan from Russia as the country scrambles to stop the collapse of its economy. It has also introduced emergency laws that give the government sweeping new powers to take over companies, limit the authority of boards, and call shareholder meetings.

Some support came from Sweden, where the central bank said Wednesday it would grant liquidity assistance to the Swedish arm of Icelandic bank Kaupthing with a loan of up to 5 billion crowns ($702 million) "to safeguard financial stability in Sweden and ensure the smooth functioning of the financial markets."

The intervention of the British and Swedish authorities underscores the effect that a full-blown collapse of Iceland's financial system would have on the rest of Europe, given the heavy investment by Icelandic banks and companies across the continent.

One of Iceland's biggest companies, retailing investment group Baugur, owns or has stakes in dozens of major European retailers - including enough to make it the largest private company in Britain, where it owns a handful of stores such as the famous toy store Hamley's.

Kaupthing has also invested in European retail groups, and racked up debts of more than $5.25 billion in five years to help fund British deals. The Icelandic government on Tuesday extended its own $680 million loan to Kaupthing to tide it over.

Against this tumultuous backdrop, Haarde vowed Tuesday that ordinary Icelanders would not pay the price for this spending spree and that his country will not default on its debt.

"Iceland has never defaulted on sovereign debt and won't," he said.