Iceland takes over biggest bank, PM urges calm

By Brett Young

REYKJAVIK (Reuters) - Iceland seized control of its biggest bank on Thursday and halted all trade on its stock market as the prime minister urged people to remain calm in the face of a financial meltdown.

By taking hold of Kaupthing KAUP.IC, the government of the north Atlantic island has now grabbed three of its biggest banks this week with Landsbanki and Glitnir also put in state hands.

As the crisis deepened, the stock exchange suspended trading in all shares and said business would not resume until Monday.

Prime Minister Geir Haarde told a news conference the country had not decided on whether to seek help from the International Monetary Fund (IMF).

Negotiations to secure a 4 billion euro ($5.45 billion) loan from Russia will begin next Tuesday. Use of swap lines set up with Nordic central banks was a last resort, Haarde said.

He urged savers not to withdraw large sums of money from banks, saying it would make the situation more difficult.

"I want to emphasize...that people remain calm and understand that the transaction system is fully functioning and deposits are safe," he said.

The prime minister said he had spoken to British finance minister Alistair Darling, who had assured him that transactions between the two countries would return to normal.

British investors were keen clients of Icelandic banks before the storm hit and Iceland was outraged when Britain used an anti-terrorism law to freeze assets in Landsbanki.

Home to just 300,000 people, Iceland epitomized the global credit boom that turned to bust. Its banks expanded dramatically overseas, investors took large positions in its high-yielding currency and foreign money poured into local projects.

Ordinary Icelanders were coming to grips with the fact that the once-gleaming economy that had given them a comfortable lifestyle had virtually imploded in a matter of days

"You hear people all over saying 'we have to change our way of life'. Now they will have to go to their mother's kitchen to learn a fish recipe," said pastor Birgir Asgeirsson of Reykjavik's Hallgrimur's Church.

"I can feel much anxiety in the people I talk to because they don't know what's next," he said.

The Financial Supervisory Authority said Kaupthing's domestic deposits were guaranteed and that all its domestic branches, call centers, cash machines and Internet operations would be open for business as usual.

"The action taken by the FME is a necessary first step in achieving the objectives of the Icelandic Government and Parliament to ensure the continued orderly operation of domestic banking and the safety of domestic deposits," it said.