Iceland takes over 2nd bank, currency defence fails

By Niklas Pollard and Omar Valdimarsson

STOCKHOLM/REYKJAVIK (Reuters) - Iceland's fast-moving financial crisis deepened on Wednesday as the government seized control of its second big bank in days and the central bank abandoned its defence of the country's currency.

Kaupthing, the island's top bank, was forced to take an emergency loan from Sweden and put its Swedish unit up for sale. Its shares dived on the Stockholm stock exchange by 34 percent before they were suspended.

The Icelandic crown, battered in recent days, plunged again and the central bank abandoned its attempt to peg the currency at 131 per euro in what Commerzbank called "the shortest peg in history".

"It has become clear that this rate has insufficient support. The bank will therefore make no further attempts in this regard for the time being," the central bank said.

The crown went on to recover all its losses against the euro, although prices were only being quoted by Icelandic banks. It was trading at 131.59 at 1505 GMT, up 14 percent from the U.S. close.

Home to just 300,000 people, the North Atlantic island epitomised the global credit boom that went bust 15 months ago. Its banks expanded dramatically overseas, investors took large positions in its high-yielding currency and foreign firms poured money into local projects.

Now facing financial meltdown, Iceland has taken over two of its largest banks -- first Landsbanki on Tuesday and now Glitnir

-- and is seeking a 4 billion euros ($5.4 billion) loan from Russia.