The savers' payment scheme will cost the government £11m
Collapsed Manx bank Kaupthing, Singer and Friedlander is unlikely to recover any funds from its parent company, the Chief Minister has admitted.
Iceland's Kaupthing Bank had issued a parental guarantee to its Isle of Man subsidiary in 2007, covering all of its liabilities including deposits.
But after meeting Icelandic officials, Tony Brown said there was little chance of the guarantee being honoured.
Mr Brown said other efforts to reach a solution for depositors were ongoing.
Kaupthing, Singer and Friedlander Isle of Man (KSFIOM) was forced to close in October 2008 when the UK government froze Icelandic bank assets, the Manx government says.
About £550m in deposits was frozen and UK treasury officials had been representing the island in discussions with Iceland in a bid to retrieve savers' money.
But following a meeting in Reykjavik with officials running the nationalised bank, Mr Brown now appears to be conceding defeat.
He said: "It is clear because of the financial position of Kaupthing in Iceland, there is no realistic prospect in the short-term that funds can be recovered from under its parental guarantee.
"However, this visit was an important step forward in information gathering and strengthening communications with Iceland, and we expect that communication to continue."
A winding-up petition for KSFIOM has been adjourned twice while government officials seek an alternative to liquidation.
If the bank is wound up, savers, many of whom have hundreds of thousands of pounds trapped in the bank, would only be able to claim up to £50,000 compensation.
KSFIOM savers are to receive a £1,000 payment from the government from 19 January as an interim measure.