Icesave is no longer allowing customers to withdraw funds - as ministers in Reykjavic, Iceland, rush to shore up the nation's financial services system.
The Icelandic government has attempted to calm savers, worried that the nation's economy might be in meltdown.
Speaking on TV yesterday, Icelandic prime minister Geir Haarde said that the government was to offer a 100 percent guarantee for all domestic bank customers' savings - and that the financial regulator was to be given greater powers to intervene in the financial firms' affairs. Earlier, trading in the nation's banks was suspended.
Thousands of Britons have taken out savings accounts with the popular Icesave and Kaupthing Edge brands - run by Iceland's Landsbanki and Kaupthing banks respectively. However, the worsening of the credit crunch and the decline of investor confidence in banks has hit the Nordic country hard.
This is because Iceland's economy is very dependent on banking, with both giant banks' balance sheets larger than the nation's GDP. Indeed, the banks' sheer size has led to saver scepticism that the government could bail out savers by guaranteeing deposits if either or both firms failed.
"We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy," Mr Haarde said. "The legislation is necessary to avoid that fate."
To this end, the banks effectively been taken over by the government in order to safeguard domestic savers. UK customers of Icesave, however, are not covered by this guarantee - due to the fact that Kaupthing and Landsbanki are registered in different ways in the UK.
As of this morning the bank is no longer allowing savers to withdraw funds from their accounts. "We are not currently processing any deposits or any withdrawal requests through our Icesave internet accounts," the provider said in a statement on its website.
"We apologise for any inconvenience this may cause our customers. We hope to provide you with more information shortly."
Customers of Kaupthing Edge remain covered by the UK government's savings guarantee, which protects the first £50,000 in each account.
