The internet bank Icesave has suspended all deposits and withdrawals from customers' accounts after the Icelandic authorities stepped in to rescue its parent company Landsbanki.

Landsbanki's other UK 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 the UK, with Icesave winning savers with its high interest rates on savings accounts and Isas.

Today a statement on its website said: "We are not currently processing any deposits or any withdrawal requests through our Icesave internet accounts. We apologise for any inconvenience this may cause our customers. We hope to provide you with more information shortly."

Although Landsbanki is set to continue trading as normal in Iceland, it is not clear what will happen to Icesave or Heritable Bank in the UK, but the Financial Services Compensation Scheme has said it is preparing for the bank to go into default.

A message on its website tells consumers: "The Financial Services Authority in the UK has reported that Icesave is now expected to go into insolvency proceedings in Iceland and this would trigger an FSCS default."

Yesterday, Icesave's website went down and its UK call centre is reported to have received unprecedented volumes of calls from savers worried about the safety of their cash.

But a spokeswoman for the group insisted that call volumes had been normal and the website was down due to technical difficulties.

Concerns about the Icelandic economy came to a head yesterday, and the Icelandic government last night presented an emergency bill giving it sweeping powers over the nation's banks.

This morning the Icelandic Financial Supervisory Authority (IFSA) announced it was taking control of Landsbanki, as it became the latest victim of the credit crunch.

The IFSA said domestic deposits were fully guaranteed by the government, and that "Landsbanki's domestic branches, call centres, cash machines and internet operations will be open for business as usual".

Guarantees

The 100% guarantee does not extend to UK savers, who would have to apply for compensation both in Iceland and the UK, and would only be able to recover up to £50,000.

The first €20,000 (£16,264) they hold is protected under the Icelandic government's scheme, and the remainder up to £50,000 by the UK Financial Services Compensation Scheme (FCSC).

A spokesman for Landsbanki said 95% of Icesave's customers had deposited less than £50,000, so would be fully protected by the FCSC.

At the start of 2008, Heritable had around £900m on deposit from UK savers.

It used the money to provide specialist finance for property developments, and some residential mortgages. All new lending appears to have been suspended.

Unlike, the savers who had their money in an Icesave, all Heritable savers' money is covered by the FSCS up to £50,000 (£100,000 for joint accounts) in the event that Landsbanki ceases to exist.

Trading normally

As news of Landsbanki's failure emerged representatives of Kaupthing, the other major Icelandic bank with a significant UK savings operation, were desperately trying to halt a Northern Rock-style run.

By mid-morning concerned savers were deluging the bank's retail division Kaupthing Edge's call centre keen to establish whether the bank was still trading, and in many cases to move their money.

The call centre number has been permanently engaged all morning.

Kaupthing Edge, which is thought to have at least 150,000 UK savers on its books, had been offering some of the most attractive savings rates in the market for the past few months.

A spokeswoman for the firm said: "Kaupthing has not been nationalised and is still trading normally. Yes, people are concerned, but I stress there is no reason to move your money. There is no reason to panic."

She added: "All savers' money is covered to £50,000 by the Financial Services Compensation Scheme (FSCS) and nothing has changed today in this respect. The company is processing all requests to move money in the normal way."

Case study: Nick Stringer stands to lose his retirement fund after locking it away in an Icesave account