The IMF has warned Iceland's economy could contract by 10% next year
The International Monetary Fund (IMF) has approved a $2.1bn (£1.4bn) loan for Iceland, after the country's banking system collapsed in October.
The loan is meant to help the country "restore confidence and stabilise the economy", the IMF said in a statement.
Iceland is the first Western European nation to get an IMF loan since 1976.
Following the IMF announcement, Finland, Sweden, Norway and Denmark said they would lend Iceland an additional $2.5bn.
"We stress that, as outlined in the IMF program, an ambitious multiyear fiscal consolidation program will help Iceland stabilise the economy, including the exchange rate, and reduce public debt over the medium-term," finance ministries from the four countries said in a statement.
The contribution from each country has yet to be decided, but Finnish Finance Ministry spokesman Martti Hetemaki said Finland would need to borrow funds to provide the loan.
The move comes after Iceland's Prime Minister Geir Haarde told Nordic countries that Iceland needed about $6bn to handle the meltdown.
Last month the IMF said it would provide Iceland with $2.1bn and help it access $3.9bn from other countries.
The IMF's two-year loan, which is subject to quarterly review, allows the country to withdraw about $827m now, and the rest in eight instalments of some $155m.
The loan was designed to help the country cope with what the IMF described as "a banking crisis of extraordinary proportions".
Iceland was forced to take over three of its biggest, debt-laden banks last month.
The Nordic nation's troubles have had severe repercussions elsewhere in Europe.
In the UK, individual savers and local councils have been unable to access funds deposited in Icelandic banks.
Iceland's currency, the krona, has almost halved in value this year and banking transactions with other countries have almost completely frozen.
The IMF has warned the country's economy could contract by as much as 10% next year.
Iceland has said the IMF funds will be used to stabilise its currency, reintroduce a flexible interest rate regime and to overhaul its financial regulation system, especially insolvency laws.
Before going to the IMF, it had been in talks with Russia for a $4bn loan, but discussions broke down.