Up to 300,000 savers in the UK have had their deposits frozen in Iceland's online bank after the country's government nationalised the institution.

The Icelandic bank Landsbanki's British internet bank, icesave, has stopped customers withdrawing or depositing money, according to its website.

"We are not currently processing any deposits or any withdrawal requests through our icesave internet accounts," it stated. "We apologise for any inconvenience this may cause our customers. We hope to provide you with more information shortly."

In the face of a full-blown financial crisis which effectively left Iceland bust, the Icelandic Government negotiated a 4bn (£3.1bn) loan from Russia to shore up the nation's finances and suspended trading in the shares of its major banks.

The Icelandic krona lost one-quarter of its value against the euro, and the government rushed through emergency legislation giving it new powers to deal with the financial meltdown.

The Icelandic Financial Supervisory Authority earlier said it would take control of Landsbanki, the country's second-largest bank by value.

Since its launch in the UK in 2006, icesave has competed fiercely with other savings providers frequently appearing on the best buy tables.

Yesterday it was offering returns of 7.06% on its fixed-rate savings accounts and paying 6.03% on its instant-access ones.

A spokeswoman for the UK's Financial Services Authority said the Icelandic authorities were responsible for regulating icesave, legally part of the UK branch of Landsbanki, and they were responsible for determining its solvency.

If icesave were declared insolvent, its customers would be eligible for refunds up to the UK ceiling of £50,000 per person, she added.

Iceland's depositor protection programme would be responsible for paying the first 20,000 (£15,500), with the UK's Financial Services Compensation Scheme contributing the balance, she said. Landsbanki said 95% of icesave's customers had deposited less than £50,000, so would be fully protected.

The UK's Financial Services Authority said it was seeking further clarity from the Icelandic regulator about what the move meant for the UK branch of Landsbanki, which includes the icesave operation.

The Iceland FSA's move was the latest step by Icelandic authorities to control a financial sector crisis that already led to the part-nationalisation of the country's number-three bank Glitnir. In the Netherlands, where Landsbanki opened online savings bank icesave.nl four months ago, customers reported problems accessing their accounts.

EU finance ministers yesterday agreed to raise the minimum guarantee for individuals' bank deposits to 50,000 (£38,750) - half the level demanded by the European Commission and several countries. The 27 ministers, meeting in Luxembourg, also gave the green light for national governments to bail out the big banks through injections of public equity.

Christine Lagarde, French finance minister, who chaired the "ecofin" talks, said small countries with smaller economies and financial institutions found it hard to meet the 100,000 (£77,500) threshold proposed by commission president Jose Manuel Barroso. The UK FSA has already guaranteed deposits up to £50,000 and the government has given a de facto guarantee on all deposits by stating that it would intervene to stop any bank going down.

In a symptom of the flight of investors away from stocks and shares, National Savings and Investments (NS&I) yesterday cut the rates it pays savers after being deluged with customers looking for a safe haven for their cash. The government-backed savings group said higher sales volumes forced it to lower interest rates on some variable savings up to 0.20%.