Iceland seeks Russian, Nordic help as shares fall

By Omar Valdimarsson and Toni Vorobyova

REYKJAVIK/MOSCOW (Reuters) - Iceland drew on Nordic help to get foreign currency on Tuesday and held talks with Russia over a possible loan to stave off a crisis that has left its economy near collapse.

Reykjavik's blue chip index sold off sharply when trading resumed after nearly a week during which the island's authorities have struggled to contain the crisis that has overwhelmed its once flourishing financial sector.

Iceland, which has already tapped the International Monetary Fund for financial aid and has been forced to abandon attempts to defend its falling currency, said it had used a swap facility on Tuesday to get 200 million euros ($273.2 million) each from the central banks of Norway and Denmark.

Last Thursday, Iceland's prime minister, Geir Haarde, said use of the swap lines would be "absolutely a last resort type of arrangement."

He said on Tuesday the drawdown was part of efforts to get Iceland's currency market working again.

Another possible source of funding is oil-producing Russia and Icelandic officials held talks in Moscow on Tuesday.

The delegation, which did not include any ministers or the central bank chief, was led by Sigurdur Sturla Palsson, director of the international and market operations department, which manages the central bank's market activities.

Haarde told a news conference in Reykjavik: "The size of the Russian loan, if there is a loan, which is not definite, has not been decided."

"We look at this as a non-political deal, if there is to be a deal, which we don't know yet. I don't know of any particular political strings that the Russians would want to attach to this."

Iceland initially mentioned a 4 billion euro ($5.45 billion) loan -- around one percent of Russia's gold and forex reserves. Russian officials say no details have been agreed, although they are looking on the loan request favorably.

Some analysts have questioned Russia's motives behind a possible deal and what price Moscow might extract from Iceland, a member of the NATO military alliance. Russia has criticized NATO expansion to its borders, seeing it as a security threat.

Russia's Finance Ministry said Iceland would lay out its wishes at the first round of talks. If agreement is reached more negotiations are likely to follow, at a higher level.

IMF, EU

Iceland took control of the operations of its major banks Kaupthing, Landsbanki and Glitnir last week.

The scale of Tuesday's stock index fall was complicated by the fact that six financial stocks -- Kaupthing, Landsbanki, Glitnir, Straumur-Burdaras, Reykjavik Savings Bank (SPRON) and Exista -- were suspended.