ADVISERS are urging British savers to limit their investments in Icelandic savings accounts to £35,000, amid fears that some of the country’s biggest banks are headed for strife.

The warning comes after Moody’s, the credit-rating agency, described Iceland’s banks as “fragile” last month, and said it was reviewing the country’s gold-plated triple-A credit rating – the highest possible.

The news will worry UK savers who have a growing stake in the Icelandic banks.

Icesave, owned by Lands-banki, launched in October 2006 and now has £5 billion of British investors’ cash, while Kaupthing Edge shot to the top of the best-buy tables this month with an fixed-rate bond paying 6.86%.

While Icesave and Kaupthing Edge deposits are “guaranteed” by both the UK and Icelandic authorities, compensation is available to a maximum of just £35,000. The average balance in an Icesave easy-access account is £38,000 and some families have as much as £1m with the bank, which they switched across from Dutch bank ING when it started to let down savers.

Kevin Mountford of Money-supermarket, the comparison site, said: “Many UK savers have considerably more than £35,000 in Icesave bank accounts. Given the current credit conditions, I wouldn’t have any more than £35,000 in one bank.”

With a population of just 360,000, Iceland’s economy has grown rapidly and now has the sixth-highest income per head of any OECD country at $40,000 (£20,600) a year. Its banks have funded this expansion, and now hold assets worth eight times the country’s gross domestic product.

However, the global credit crunch has meant that international investors have started to question the banks’ expansion and are no longer so happy to stump up their cash. This resulted in the unusual step by Moody’s to put Iceland’s entire banking sector on review.

Icesave insists its business is healthy. Mark Sismey-Durrant, managing director, said: “Icesave is hugely liquid. A number of banks across Europe would die for the kind of funding that we’ve got. Moody’s announcement was frustrating – a lot of banks are on watch, not just the Icelandic banks. It’s a function of the global economy.”

Admittedly, most of the concern about Iceland centres on Kaupthing, the country’s largest bank. It has had a presence in Britain since 2005 through its purchase of investment bank Singer & Friedlander. Earlier this month, Kaupthing Edge, the group’s online banking arm, also made an audacious debut into the UK savings market.

Its instant-access savings account is guaranteed to remain a minimum of 0.3 percentage points above Bank rate until 2012, and it announced on Thursday that its rate would stay at 6.5% despite the Bank of England’s quarter-point reduction.

Kaupthing Edge already operates in Norway and Sweden and has launched in Finland and Bel-gium as well as Britain in the past three weeks. It has taken deposits from 30,000 new customers in the past four months.

This aggressive strategy has raised fears that the bank is simply using British savers to plug a funding gap caused by the global credit crunch – and has prompted unflattering comparisons with Northern Rock.

Mountford said: “It appears funding issues may have driven the banks’ desire for savers’ cash. We want to know if these banks will drop savers once they have attracted the necessary funds, or are here to stay.”

Research from investment bank Morgan Stanley reveals that Kaupthing’s borrowing costs have increased 400% in the past year. By comparison, Landsbanki’s have increased 200%, the same amount as Brad-ford & Bingley. Analysts have concluded that Kaupthing is 7.5 times more likely to default than another European bank.

The now notorious business model embraced by Northern Rock also centred on rapid expansion, but without the savings to fund its loan book.

However, Gudni Adalsteins-son at Kaupthing rejects the comparison. He said in an interview with The Sunday Times: “The difference between us and Northern Rock is that we have a huge corporate banking arm.”

He added that current estimates of the bank’s borrowing costs – based on so-called credit default swaps, which take into account the cost of a bond issue to accompany the loan – are not a fair measure.

“If we were to go to the markets right now we would be close to these spreads, but we will not do so. We have enough money to run the bank for quite a long time without having to face the music,” he said.

Ashley Whittaker, head of retail savings, added: “We are here for the long term. Your money is safe with Kaupthing. We’re proud of our results.”

Sue Hannums of adviser AWD Chase de Vere, said: “We are happy to recommend any bank that can guarantee savers’ deposits, however we would not recommend savers invest any more than £35,000 in each account. This applies to UK banks as well.”