Iceland bank sues UK government over collapse

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Iceland said on Monday state-controlled Kaupthing Bank was suing Britain over a decision to place the bank's British arm in administration, potentially reigniting a simmering diplomatic row.

The British Treasury placed Kaupthing Singer and Friedlander in administration on Oct 8, at the height of Iceland's financial crisis, saying it was doing so to protect British retail depositors.

A day later, Iceland took control of Kaupthing, the last of the three biggest commercial banks taken over as the North Atlantic island's financial system collapsed under the weight of tens of billions of dollars in foreign debts.

"The Resolution Committee of Kaupthing has decided to sue the British Government and has the full support of the government," a press release from the Icelandic prime minister's office said.

Iceland has long been angry at Britain's handling of the situation, which included the use of anti-terror legislation to seize the assets of Icelandic bank Landsbanki.

Prime Minister Geir Haarde referred to the matter repeatedly in the weeks that followed, always holding out the possibility of a lawsuit. Iceland has argued that Britain's actions helped bring about Kaupthing's failure prematurely.

The matter had threatened to derail a much-needed aid package for Iceland from the International Monetary Fund and several European countries. The aid was agreed in November but only after a breakthrough on how to compensate savers in Icelandic accounts in Britain, the Netherlands and Germany.

British Prime Minister Gordon Brown and the British Treasury have stood by the decisions taken.

A British Treasury spokesman said the Treasury was not aware of any legal action. But he said that the Financial Services Authority had judged Kaupthing's UK subsidiary to be unable to meet its obligations to depositors.

A spokesman for Haarde said Iceland felt that providing support for legal action, rather than bringing a suit directly, offered the best chance of success.

"The idea is that the Icelandic government provides financial support to the resolution committees," said Kristjan Kristjansson, press secretary for Haarde.

"After careful consideration, the government of Iceland believes that the resolution committees have a better case against British authorities, than the Icelandic government," Kristjansson said.

The statement said Iceland's government is also considering supporting a lawsuit by the resolution committee of Landsbanki and the government would discuss the matter on Tuesday.