Icesave, the internet bank with thousands of UK clients, has stopped savers withdrawing their cash after Landsbanki, its parent company, was taken over yesterday by the Icelandic government as the financial crisis gripping the Nordic country deepened.

Icesave, the internet bank with thousands of UK clients, has stopped savers withdrawing their cash after Landsbanki, its parent company, was taken over yesterday by the Icelandic government as the financial crisis gripping the Nordic country deepened.

In a statement on its website, Icesave said it has suspended its UK banking operations which meant British customers cannot make withdrawals on around £4bn in deposits.

Landsbanki's other British operation, Heritable Bank, has also stopped savers making withdrawals and is no longer offering mortgages.

Between them, the two brands have more than 300,000 customers in Britain. Icesave gained popularity in the UK with its high interest rate of 6.10% on its easy access ISA and a rate of 7.06% on its fixed-rate savings account - after 12 months.

Iceland's banking minister confirmed that Landsbanki, the island nation's second-largest bank, has gone into receivership and would be taken over by the Icelandic Financial Supervisory Authority (IFSA) following emergency legislation that was passed on Monday night.

Iceland's third-biggest bank, Glitnir, was nationalised in an earlier move by the government.

The regulator said: "Based on new legislation, the IFSA proceeds to take control of Landsbanki to ensure continued commercial bank operation in Iceland.

"Domestic deposits are fully guaranteed, as declared by the government. Landsbanki's domestic branches, call centres, cash machines and internet operations will be open for business as usual.

"The objective of the IFSA's action is to guarantee a functioning domestic banking operation."

Icelandic Prime Minister Geir Haarde said he believes Landsbanki has enough assets to take care of Icesave's UK customers. Landsbanki later assured foreign investors that it has sufficient reserves and borrowing capacity to cover its deposits.

In the UK, deposits are now protected up to £50,000 per account provider; the Republic of Ireland last week offered complete protection for retail and commercial deposits across six banks. Other European nations like Germany and Denmark are also offering protection to savers.

Iceland's Samson holding company and owner of 41% of Landsbanki said it is seeking temporary protection from its creditors.

The company said it is applying for a moratorium on payments at Reykjavik's district court. It will be up to the court to decide whether to grant the moratorium and for how long.

Meanwhile, Kaupthing, Iceland's largest bank, said it has received a 500m loan from the Icelandic central bank.

But Kaupthing said it has not been approached by the country's financial regulator about any possible state intervention.

Kaupthing spokesman Jonas Sigurgeirsson said the loan showed his bank was in "an entirely different situation" from the other two nationalised banks.

He said that the government was trying to support, rather than take over, Kaupthing.

The Icelandic government also announced it has negotiated a 4bn (£3bn) loan from Russia to shore up the nation's finances amid the worst financial crisis to hit Europe since the 1930s.

The moves came a day after trading in shares of major banks was suspended and the Icelandic krona lost a quarter of its value against the euro.

Haarde warned late on Monday night that the heavy exposure of the tiny country's banking sector to the global financial turmoil raised the spectre of "national bankruptcy."

Iceland is paying the price for an economic boom of recent years that saw its newly affluent companies go on an acquisition spree across Europe and its banking sector grow to dwarf the rest of the economy.

Bank assets are nine times annual gross domestic product of 14bn.

Investors are punishing the whole country for the banking sector's heavy exposure to the global credit squeeze - its currency has gone through the floor, imports have fallen and inflation is soaring.

A collapse of the Icelandic financial system could reverberate across Europe, given the heavy investment by Icelandic banks and companies in Britain and other European countries.

One of the country's biggest companies, retailing investment group Baugur, owns or has stakes in dozens of major European retailers - including enough to make it the largest private company in Britain, where it owns a handful of well-known shops such as the London toy store Hamley's An International Monetary Fund spokesman said an IMF staff team was in Iceland on a fact-finding mission and Norway said it was ready to discuss help but had heard nothing from Reykjavik.