Stalemate in talks between Iceland and Britain over the fate of the money from UK savers that is frozen in an Icelandic bank was being blamed last night for delaying a bailout of the stricken North Atlantic economy.

The International Monetary Fund is believed to be insisting that Reykjavik’s dispute with London over British savings held in Icesave, the UK offshoot of Iceland’s nationalised Landsbanki, is resolved before it will make a decision on the scale of emergency support for the tiny island nation.

The IMF’s governing executive board was meeting last night to debate a potential rescue package for Iceland, which could total $6 billion (£3.7 billion) and is likely to be backed by several Scandinavian central banks and the Bank of Japan. It would make Iceland the first Western country to receive an IMF loan since Britain went to the fund in 1976.

But it was feared last night that a deal to shore up the Icelandic economy and financial system could be delayed by the continuing obstacle posed by Reykjavik’s still unresolved row with Britain over Icesave.

Talks in the Icelandic capital between officials from the country’s government and the British Treasury broke up last night with no agreement.

The negotiations are thought to revolve around Britain lending Iceland sufficient funds for it to repay the savers. Some reports have suggested that a loan from the UK of £3 billion may be required and is being sought by Reykjavik. However, Whitehall sources played down the figure.

About 300,000 British savers had accounts worth about £4 billion in Icesave, which suspended operations on October 7 and stopped customers from both depositing and withdrawing money.

Before the talks broke up last night, Geir Haarde, the Icelandic Prime Minister, told a newspaper in the country that; “We have not accepted their [Britain’s] legal arguments.”

On Wednesday, Mr Haarde admitted on Iceland’s national radio services that IMF emergency support for his country’s economy was contingent on a deal with Britain being settled first. “The IMF would like to see those matters solved before any further steps are taken,” he said.

He added that a package from the IMF was also contingent on a new national economic forecast being made, and one factor that would affect that would be the scale of other foreign loans to his country – presumably including a potential loan from Britain.

Iceland’s once-booming financial sector has been undercut after the global financial crisis of recent weeks sent the krona, the country’s currency, into virtual freefall, leading its government to seize control of banks including Kaupthing and Glitnir as well as Landsbanki.

As a consequence, the bulk of the money that belongs to British savers, which is being held in Icesave, has been frozen since early October.

Petur Bloendal, chairman of the Icelandic Parliament’s tax and economic affairs committee, told reporters yesterday that he did not believe that Icelandic MPs would approve the proposals for a British loan.

He said that British and Dutch demands over Icesave accounts in the two countries amounted to the equivalent for every Icelander of three to four times the reparations that were imposed on Germany after the First World War.

Last night the Treasury insisted that it was continuing to talk to Reykjavik, despite the winding up of the present round of negotiations.

A spokesman said: “Any agreement with the IMF is always dependent on countries honouring their debts and treating creditors equally. The UK is not the only country involved in this process and other creditors will also expect payment.

“The UK Government continues to work constructively towards a resolution with the Icelandic Government and looks forward to a swift solution.”

An Icelandic Government spokeswoman said: “This round of discussions has ended, but talks are not overand will be continued in the very near future.” She declined to give details of the talks or what progress was made, and did not give the exact date of the next round of talks.

A spokesman for the IMF also declined to comment on the fund’s continuing talks with Iceland.

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