Iceland's Government last night said that it would refund British savers' money in the wake of the collapse of Icesave, the internet bank owned by Landsbanki, in an attempt to secure funding from the IMF.

The $2 billion (£1.3 billion) IMF loan, part of a $6 billion package that Iceland needs to help it to rebuild its tattered economy, hit the buffers last week after the Netherlands, Germany and Britain demanded that the rescue package be conditional on Iceland giving some financial guarantees to foreign depositors.

Announcing the agreement, Geir Haarde, Iceland's Prime Minister, said: “It became increasingly clear that we were not just up against two countries but all twenty-seven in the European Union.”

Mr Haarde, in a statement with Ingibjorg Solrun Gisladottir, the Foreign Minister, said that “the way had now been opened for a loan from the IMF”, which is to address Iceland's request on Wednesday. The ministers said: “According to the agreed guidelines, the Government of Iceland will cover deposits of insured depositors in the Icesave accounts in accordance with EEA [European Economic Area] law.”

The EEA agreement states that the Government must repay about the first £18,000 in British savers' accounts.

Last month, the British Government and the Financial Services Compensation Scheme (FSCS) said that all savers would be repaid in full after the collapse of Landsbanki, meaning that UK taxpayers had to cover the first £18,000 of each account. That bill now reverts to Iceland.

The FSCS will repay any further savings up to the usual threshold of £50,000 at a cost of £1.4 billion, with the Government stepping in to cover any amounts above this threshold. The total cost to the Treasury of compensating the first £18,000 of savings, and any sums above £50,000 is £800 million, but now taxpayers will not have to pay all that bill.

A spokesman for the Treasury said: “The UK Government has always supported an IMF loan to Iceland and welcomes any progress which would see a resolution for UK depositors and equal treatment for all creditors.” UK councils and other organisations with deposits in Icelandic banks do not gain from the EEA agreement. More than 70 councils in England and Wales have exposure of totalling £643 million to Icelandic banks. Iceland's liability to such depositors is not yet known.

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