UK and Iceland clash on crisis

Britain was locked in an increasingly acrimonious dispute with Iceland on Thursday night after the nationalisation of the Nordic country's largest banks put close to £800m of local authority money at risk and prompted Gordon Brown to threaten to seize the assets of Icelandic companies.

On Thursday, Iceland was forced to nationalise Kaupthing, its biggest and last major bank, a move its prime minister blamed in part on the "action taken against the bank by the British government".

Geir Haarde also criticised the British government for using anti-terror laws to freeze £4bn of bank assets. "Not many governments would have taken that very kindly," he said.

The unprecedented move – criticised by legal experts as a distortion of the law's intent – was used to protect the deposits of British account holders.

The action took place on Wednesday to freeze assets of Iceland's second-biggest bank, Landsbanki, which went into receivership this week.

Meanwhile, the ramifications of the Icelandic banking crisis continued to jolt the British corporate world.

Baugur, the Icelandic retail group, was on Thursday trying to find out the fate of its holdings in large chunks of the British high street. Kaupthing and Landsbanki are two of its financial backers.

It emerged on Thursday that Unity Investments, an investment vehicle part owned by Baugur, held its stakes through contracts for difference – instruments that allow investors to build up an interest in a company without actually holding the shares – backed by Icelandic banks. This could mean that the stakes have passed to the adminstrators, although a person close to Baugur on Thursday night said it was too soon to say for sure what had happened to those contracts, pointing out that Baugur should still have a claim to those stakes in Woolworths, French Connection, Moss Bros and Debenhams, despite their backers being in administration.

Gordon Brown said he would take whatever action was necessary against the Icelandic authorities to recover money for UK citizens. He said Iceland itself had "effectively defaulted" and the events of recent days had been "completely unacceptable".

Iceland's stock exchange on Thursday suspended trading in all shares after Kaupthing joined Landsbanki and Glitnir in enforced nationalisation.

The collapse of Kaupthing came just hours after London's City watchdog placed one of its subsidiaries – Kaupthing Singer & Friedlander – into administration, forcing the parent company into technical default. The executive chairman of Kaupthing directed part of the blame for the collapse into state hands of his bank towards the UK government. "Our belief is that really high up in the [UK] hierarchy there was the decision to close down everything Icelandic," Sigurdur Einarsson told the Financial Times.

British individuals with savings in Icelandic banks – such as Icesave, a popular Landsbanki account – are protected under the Financial Services Compensation scheme.

However, concerns are growing for more than 108 local authorities that have £800m-plus invested in Iceland's banks.

The Treasury was on Thursday resisting a blanket bail-out but has promised unspecified help on a "case-by-case basis" to councils facing immediate cashflow pressures as a result.

Additional reporting by Jean Eaglesham and Jimmy Burns

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