The hurricane in the world financial markets hit Iceland yesterday, forcing its Government to take control of Glitnir as depositors fled the country's third-largest bank, while a leading Icelandic investment group sought protection from its creditors.

In an attempt to prevent the collapse of Glitnir, the Government has agreed to take a 75 per cent shareholding, injecting €600 million (£478 million) into the bank.

The rescue package was agreed late on Sunday after talks between Glitnir, the Icelandic Central Bank and the Government. Glitnir's ability to source funds in the capital markets dried up last week and it was forced to seek state funds. David Oddson, the Central Bank Governor, said: “Without this intervention, Glitnir would have ceased to exist within the next few weeks. It's as simple as that.”

Meanwhile, Stodir, an investment company formerly known as FL Group, which owns a third of Glitnir and was set to take a big stake in Baugur, the retail conglomerate, waved a white flag, filing for bankruptcy protection in a Reykjavik court.

The tumbling value of Glitnir stock appears to have rebounded on Stodir, which is believed to have used its Glitnir shares as collateral for loans. Glitnir has a close relationship with Stodir - in August, Stodir reported a quarterly loss of IKr11.6 billion (£648 million) after writing down the falling value of the investment group's 32 per cent shareholding in the bank.

Stodir is controlled by Jon Asgeir Johannesson, an Icelandic tycoon, who in July tightened his control over the group when Stodir acquired 39 per cent of Baugur, the retailing group of which Mr Johannesson is founder and co-chairman. Baugur has a big presence in Britain, where it controls Iceland, House of Fraser and Hamleys.

The Icelandic Government sought yesterday to reassure the public after taking control of the bank. Geir Haarde, the Prime Minister, said: “Glitnir is now in a position to meet all obligations. The same goes for the other banks, which are not in the same position as Glitnir.”

Glitnir appears to have lost the ability to fund its operations over the past fortnight as the interbank lending market seized up after the collapse of Lehman Brothers. Like many ambitious banks, Glitnir sought to expand by funding its lending in the interbank market with less than a third of its business backed by deposits.

Larus Welding, Glitnir's chief executive, indicated yesterday that there would be significant asset writedowns, but he insisted that it would be more than covered by the capital injection. He said the bank had been subjected to “a very short-term squeeze” and had taken a precautionary measure to prevent a liquidity crisis. “We were under pressure from increased margin calls on short-term funding and by the outflow of wholesale deposits,” he told investment analysts yesterday. Mr Welding said that customers would not be affected by the change in ownership and that the present investment strategy would not change.

The recent events were forecast as early as March, when the credit rating agencies Fitch and Standard & Poor's issued warnings about Iceland's sovereign debt, hinting that the Government might be forced to bail out one of the country's trio of big banks - Kaupthing, Glitnir and Landsbanki.

Iceland's banking system has been under intense scrutiny for most of this year as it struggled with rampant inflation and the fallout from an overheated economy and collapsing currency. In an effort to quench galloping wage and price inflation, the central bank raised interest rates to 15.5 per cent, causing difficulties for Icelandic households.

High interest rates severely hampered the ability of Iceland's banks to fund their business; the global liquidity squeeze appears to have been the final blow for at least one of them.

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