Iceland's stricken economy will receive $4.6 billion (£3.1 billion) in emergency rescue funds from a combination of the IMF and other Nordic nations.

Finland, Sweden, Norway and Denmark said this morning that they would lend the cash-strapped island nation $2.5 billion to help its economy recover.

The finance ministries of the Nordic countries said: “We stress that, as outlined in the IMF program, an ambitious multiyear fiscal consolidation program will help Iceland stabilize the economy, including the exchange rate, and reduce public debt over the medium-term.”

The International Monetary Fund (IMF) approved a $2.1 billion emergency package for Iceland last night to help Iceland rebuild its tattered economy.

The two-year “stand-by” arrangement is structured to allow about $827 million available immediately.

The remainder will come in eight equal installments of about $155 million, subject to quarterly reviews. “Iceland is in the midst of a banking crisis of extraordinary proportions,” said John Lipsky, the IMF’s deputy managing director.

The reuse package had been delayed because of disputes with European creditors, including Britain over its citizen’s deposits in Icelandic banks.

However, Iceland's Government earlier this week said that it would refund British savers' money in the wake of the collapse of Icesave, the internet bank owned by Landsbanki, in order to secure funding from the IMF.

Iceland’s financial crisis will push the economy deeply into recession next year, with unemployment likely to quadruple to 5.7 per cent, the IMF predicted last night.

The forecasts show real gross domestic product contracting by 9.6 per cent in 2009, compared with estimated growth of 1.6 per cent for this year.

Geir Haarde, Prime Minister of Iceland, said “I believe (it) is an important step forward towards the rebuilding of our economy. With the IMF agreement in place, we can commence our recovery program with full force and bring our economy back on track. I thank those countries who also contributed to the loan package.”

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