Crisis-hit Iceland has taken control of Kaupthing, its biggest bank, and suspended trading on its stock exchange for two days.

With the nationalisation of Kaupthing, the Icelandic Government now has control of all three of the country's big banks — Kaupthing, Landsbanki and Glitnir — as it struggles keep a lid on the panic.

The OMX Nordic Exchange Iceland said it will not re-open until Monday, due to “unusual market conditions." Meanwhile trading in the Icelandic crown ground to a halt.

It came as Gordon Brown condemned Iceland’s position on the freezing of bank accounts held by British savers as “totally unacceptable." The Prime Minister said the Government will consider legal action if banking issues are not resolved. Dozens of local councils risk losing hundreds of millions of pounds of taxpayers’ money held in Iceland’s stricken banks.

Yesterday, the British authorities seized control of Kaupthing Singer & Friedlander, the UK arm of Kaupthing, which employs almost 700 people in the City.

Kaupthing had become a key player in the British economy by taking stakes in many high street names, including Mitchells & Butlers, the pub group, and Debenhams, the department store chain.

Iceland’s Financial Supervisory Authority (FME) said on its website that Kaupthing’s domestic deposits were fully guaranteed and that all its domestic branches, call centres, cash machines and internet operations would be open for business as usual.

“The Icelandic Financial Supervisory Authority has under powers granted by the Icelandic Parliament proceeded to take control of Kaupthing,” the financial regulator said.

“The action taken by the FME is a necessary first step in achieving the objectives of the Icelandic Government and Parliament to ensure the continued orderly operation of domestic banking and the safety of domestic deposits.”

Kaupthing said its board had resigned and that it had requested the authorities take control.

In a demonstration of how fast Iceland’s crisis has accelerated, Kaupthing said that as late as September 26, almost two weeks ago, directors believed the bank was performing well and that third-quarter results would be good.

The final straw came when Britain transferred control of the business of Kaupthing Edge, its Internet bank, to ING Direct and put Kaupthing’s UK operations into administration. That put Kaupthing in technical default, according to loan agreements.

“It did not matter that the parent company had sufficient liquidity and its position was solid,” Kaupthing said in a statement.

As Iceland abandoned efforts to shore up its currency and concentrated on efforts to secure a financial lifeline from Russia, Geir Haarde, the country's Prime Minister, said that Iceland was probably paying the price for punching above its weight.

“What we have learned from this whole exercise over the last few years is that it is not wise for a small country to try to take a leading role in international banking,” he said last night.

Iceland’s banking assets amounted to about nine times its gross domestic product and its current account deficit has billowed to 16 per cent of GDP last year.

Mr Haarde said he had not asked for help from the International Monetary Fund, which has sent a delegation to Reykjavik. But he said assistance from the fund was “definitely an option” and separate negotiations to secure a €4 billion (£3.1 million) loan from Russia would begin next Tuesday.

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