UPDATE 3-IMF board approves $2.1 billion Iceland loan

(Adds comment from Iceland's prime minister)

By Emily Kaiser

WASHINGTON, Nov 19 (Reuters) - The International Monetary Fund said on Wednesday its board approved a $2.1 billion loan for Iceland to try to stabilize what the fund called a "banking crisis of extraordinary proportions."

The two-year, stand-by arrangement is structured so that Iceland can immediately draw about $827 million, with the rest in eight installments of about $155 million, subject to quarterly reviews.

"Iceland is in the midst of a banking crisis of extraordinary proportions," John Lipsky, the IMF's first deputy managing director, said in a statement.

Iceland has been anxiously awaiting emergency funding after the global financial crisis sparked the collapse of three of its major banks and rapid depreciation of the crown.

The IMF forecast that Iceland's economy would be badly damaged, with real gross domestic product falling 9.6 percent next year after an expected 1.6 percent advance in 2008. It estimated that the unemployment rate would quadruple to 5.7 percent next year.

Iceland will remain in a "serious recession" through 2010, the fund said, but once confidence is restored and balance sheets readjust, domestic demand should rebound strongly in 2011.

"Long-term growth prospects are favorable, in line with Iceland's very strong fundamentals, not least its highly educated labor force, favorable investment climate and rich natural resource endowment," the IMF said.

In a separate statement, Iceland's Prime Minister Geir Haarde called the IMF loan program an important step toward rebuilding the economy.

"Our task now is to overcome the difficulties we face and to regain the trust and the standing among other nations which we enjoyed before the impact of the global financial crisis struck Iceland," he said.

TIGHT MONETARY POLICY

The IMF said its loan would fill about 42 percent of the country's 2008-2010 financing gap. The rest would be met by official bilateral creditors.

Finland, Sweden, Norway and Denmark plan to lend Iceland a total of $2.5 billion, a Finnish official said earlier on Wednesday.

As part of the IMF's loan program, Iceland will maintain an "appropriately tight monetary policy". Restrictions on capital outflows will remain in the near term.

The fund said last month that its staff had hammered out a loan agreement, which would be presented to the board in early November. But consideration was delayed because of disputes with European creditors, including the Netherlands and Britain, over their citizens' deposits in Icelandic banks abroad.