Iceland announces Russian loan, nationalizes bank

However, the Russian state news agency RIA-Novosti quoted Deputy Finance Minister Dmitry Pankin as saying there had been no formal approach from Iceland and no decision had been made. Iceland's central bank followed with an amended statement: "It should be emphasized that the countries have decided to start in the next few days negotiations on financial issues."

A loan would support the government's efforts to gain control of an increasingly dire financial situation, which saw the government coming to rescue of the third-largest bank, Glitnir, only last week.

Haarde warned late Monday that the heavy exposure of the tiny country's banking sector to the global financial turmoil raised the specter of "national bankruptcy."

Iceland is paying the price for an economic boom of recent years that saw its newly affluent companies go on an acquisition spree across Europe and its banking sector grow to dwarf the rest of the economy. Bank assets are nine times annual gross domestic product of 14 billion euros ($19 billion).

Investors are now punishing the whole country for the banking sector's heavy exposure to the global credit squeeze--its currency has gone through the floor, imports have fallen and inflation is soaring.

"In the perilous situation which exists now on the world's financial markets, providing the banks with a secure life line poses a great risk for the Icelandic nation," Haarde said in a televised address to the nation. "There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy."

Just hours earlier, Haarde had said that no special measures were necessary--but credit lines to banks then seized up amid speculation about the solvency of the country's major banks.

The new laws gave the Central Bank of Iceland and the Icelandic Financial Supervisory Authority detailed and vast authority to intervene in the control and operation of Icelandic financial institutions, including the ability to take over or create new institutions, call shareholder meetings and limit the authority of boards.

Earlier Monday, the Icelandic Financial Supervisory Authority suspended trading in financial instruments issued by Kaupthing, Landsbanki, Glitnir, Straumur-Burdaras, Exista and Spron.

The government also put 100 percent guarantees on savers' deposits, following in the footsteps of Ireland, Germany, Austria, Greece and Denmark.