Icesave collapsed last October

Iceland has agreed to repay British and Dutch government money paid out to depositors following the collapse of the savings bank Icesave.

The UK loaned Iceland £2.3bn last year to reimburse UK savers with Icesave, after the entire Icelandic banking system was nationalised.

The savings of 300,000 retail depositors who held accounts in Britain with Icesave were affected.

The incident sparked tensions between London and Reykjavik at the time.

Britain used anti-terrorism laws to freeze the assets of Icelandic banks, which had collapsed in the wake of financial crisis.

British savers with Icesave were refunded in full at the time by the UK Treasury.

'Good news'

Following drawn-out negotiations, Iceland said it would now repay the £2.3bn plus interest.

The UK Treasury said the deal was a positive step forward for relations between the countries.

"This is good news for UK taxpayers and good news for Iceland," a Treasury spokesman said.

"The government welcomes Iceland's commitment to recognise its obligations under the EC Deposit Guarantee Scheme to repay depositors in Icesave."

However, British local authorities and bodies will continue to wait to get their money back, as today's agreement relates only to retail depositors.