The woes of Iceland's stricken banking sector reverberated across the UK today as the British Government seized control of Kaupthing Singer & Friedlander (KSF) and plunged the lender into administration.

The UK Treasury said it had received guidance from the Financial Services Authority that KSF, the UK subsidiary of Kaupthing, was no longer in a position to meet its obligations to depositors.

It immediately invoked new banking powers and transferred KSF's £2.5 billion of retail deposits, known as Edge, to ING Direct, the UK retail savings arm of the Dutch bank.

The move safeguards the deposits of 160,000 of the bank's internet-only Edge operations. ING has also taken on £538 million of deposits and 22,000 customers from Heritable Bank, part of Landsbanki.

The rest of KSF has been put into administration, according to the Treasury.

It said that it had taken temporary ownership of the bank's assets, including buildings and other property. It said it would stand behind KSF's commercial customers, recouping the capital outlay from the proceeds of the subsequent sale of assets.

It is thought that KSF employed between 400 and 500 staff in London. Their future remains unclear today.

It is also not yet known whether the bank's Mayfair offices in Hanover Street, London W1 form part of the administration order.

"This is the right course of action to protect savers, ensure financial stability and safeguard the interests of the taxpayer," the Treasury said.

Shares in Kaupthing, Iceland's biggest bank, plunged on the Stockholm stock exchange by 34 per cent before trading was suspended earlier today.

The bank has revealed that it had received an emergency loan of up to 5 billion crowns (£405 million) from Sweden and it has put its Swedish unit up for sale.

The demise of KSF came as Iceland's financial crisis accelerated. The Icelandic Financial Supervisory Authority said that it would take full control of Glitnir, the bank that it part-privatised at the beginning of last week.

The bank is the second Icelandic institution to be nationalised this week since emergency legislation giving the Government new powers was passed on Monday night.

Landsbanki was nationalised yesterday, leaving 300,000 British savers uncertain about whether they had lost their life savings.

Kaupthing also said that it was participating in the reorganisation of Glitnir — raising the prospect that Iceland's three biggest banks could end up in some form of national ownership.

As well as nationalising two banks, Iceland has been forced to prop up its ailing currency and ask Russia for a loan of €4 billion (£3.1 billion) as the country’s financial system has been plunged into chaos.

An Icelandic delegation is due to visit Moscow today to negotiate the terms of the lifeline from Russia, funds that the country desperately needs to bolster its foreign exchange reserves.

On Tuesday, the head of Iceland’s central bank predicted that the country would emerge stronger from the financial crisis but admitted that Glitnir, the country's third largest bank, may not survive.

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