Alistair Darling has moved to reassure savers worried that they have lost their money with the firm's collapse.
The chancellor of the exchequer has promised Icesave customers that they will get their money back, after the firm entered administration.
Speaking to the BBC, Alistair Darling also revealed that Iceland's government had gone back on their obligation to pay compensation to savers, following the collapse of Icesave's Reykjavik-based parent company Landsbanki.
This affects Icesave - which retains around 300,000 customers, who collectively have around £4 billion saved - due to the way it is registered in the UK.
The savings provider is not covered by the financial regulator's compensation scheme. Instead, the first £16,000 of a customer's savings deposits is covered by the Icelandic regulator, with the UK service making up the rest, up to the current £50,000 deposit guarantee limit.
Following Landsbanki's nationalisation earlier this week, Iceland's government seems to have broken this commitment.
"The Icelandic government, believe it or not, have told me yesterday they have no intention of honouring their obligations here," Mr Darling said.
"Because this is a branch of a foreign bank the first call would be on the Icelandic compensation scheme which, as far as I can see, hasn't got any money in it," he added. "The British scheme would top that up to £50,000, but people over and above that would lose out."
"But I have decided in these exceptional circumstances that we will stand behind those depositors so they get their money back."
Also speaking today, prime minister Gordon Brown indicated that the UK government was willing to sue the savings guarantee dispute.
"We are taking legal action against the Icelandic authorities," he told reporters. "We are showing by our action that we stand by people who save."
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