Several Icelandic banks have failed and will not release deposits
A delegation of Treasury officials has arrived in Iceland to seek assurances that UK depositors will not lose money as a result of its banking crisis.
The meetings follow sharp exchanges between Gordon Brown and his Icelandic counterpart Geir Haarde on the crisis.
UK officials will demand that £1bn in funds invested by councils and other public bodies in collapsed Icelandic banks must be recovered quickly.
Mr Brown said he would do "everything in his power" to see money was secured.
'Finding a solution'
He said the UK authorities were continuing to investigate where UK deposits were being held in co-operation with Iceland's government.
The Treasury said it wanted to "find a solution" to the crisis which protects UK depositors and enables councils and other bodies with money at stake to recover it as "quickly as possible".
Gordon Brown: 'This is the responsibility of the Icelandic authorities'
Government officials and representatives from the Bank of England and the Financial Services Authority will spend the weekend tackling the crisis and will look to defuse a row between the two countries.
After the Icelandic government took control of three of its leading banks, Mr Brown strongly condemned Iceland's failure to guarantee British savers' deposits.
Mr Brown said Iceland's actions were "effectively illegal" and "completely unacceptable".
Chancellor Alistair Darling has said all UK private accounts affected by the bank crisis will be protected and has taken measures to secure UK deposits held by Iceland's Heritable and Kaupthing banks.
But the Treasury wants to find out how soon customers of UK online bank IceSave, which is not wholly regulated by the UK authorities, can get hold of their money after its parent Landsbanki collapsed.
Landsbanki was declared insolvent on Tuesday, leaving 300,000 UK IceSave customers unable to access their accounts.
Geir Haarde on the 'painful process' facing the banking industry
The UK government froze all UK-held assets of Landsbanki after it collapsed and threatened to take similar action against other Icelandic firms in the UK because of concerns about the "detrimental" effect of Iceland's banking crisis on the UK economy.
However, it has since partially lifted the Landsbanki freeze, exempting certain commercial activities from the order, and allowing business customers to access their accounts.
But Mr Haarde responded angrily to the move, saying it was "not very pleasant" to learn that anti-terror laws were being used against its companies and also blamed Britain for the collapse of Kaupthing.
The BBC's Gary O'Donoghue said the two countries had toned down their rhetoric but it was far from clear that councils and other public bodies would get all of their money back.
Ahead of Friday's meetings, the fate of funds deposited by British companies and public bodies in Icelandic banks remains unclear.
British firms are reported to have invested £12bn in Iceland's banks while the government has not offered to protect the investments of UK councils, police and transport authorities.
So far more than 100 local authorities in England, Wales and Scotland have revealed that they have deposits worth £842.5m in total.
LARGEST CONFIRMED DEPOSITS
Kent County Council, £50m
Nottingham City Council, £42m
Transport for London, £40m
Norfolk County Council, £32.5m
Dorset County Council, Hertfordshire County Council, £28m
Public bodies, such as police authorities and Transport for London, have invested a further £100m while about 60 UK charities may have deposited up to £120m in Iceland's banking system.
After a meeting with City minister Lord Myners, officials from the charitable sector said they were "hopeful" that organisations would get all their money back but expressed disappointment they had not been given an absolute guarantee.
Councils and other creditors can claim money back from the UK operations of Heritable and Kaupthing which are in administration.
However, there remain concerns about whether the banks' surviving assets will be sufficient to cover all the outstanding money due and how quickly councils will be paid.
There is also uncertainty over any money held by Landsbanki itself and Glitnir, another Icelandic bank, which are in receivership.
Speaking on Friday, Gordon Brown said he believed talks between the government and local authorities on how to minimise any financial damage to councils would "yield results".
The Local Government Association wants the same blanket guarantee for councils as for personal customers of IceSave and other banks.
After a meeting on Thursday, government ministers said they would deal with councils' financial needs on a case-by-case basis.
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