Britain-Iceland talks on frozen funds begin

REYKJAVIK, Oct 11 (Reuters) - Talks between Britain and Iceland on the fate of an estimated 1 billion pounds ($1.73 billion) of British deposits trapped in Iceland's banks began on Saturday and are expected to last through the weekend, a government spokeswoman said.

"The talks started at 9 a.m.," the spokeswoman said. No other information was immediately available.

Relations between Britain and Iceland in the past week have soured to levels last seen during the 1970s "Cod War" as the financial crisis that has humbled the Atlantic nation dragged in European depositors and investors.

There have been tense exchanges between the two countries, and Prime Minister Geir Haarde expressed outrage when Britain used an anti-terrorism law to freeze assets in Icelandic bank Landsbanki.

London said it considered the Icelandic authorities' behaviour unacceptable, and it was difficult to get information from them, but added on Friday it hoped to resolve the situation rapidly.

Haarde has said the sharp criticism this week from British Prime Minister Gordon Brown had been "disconcerting ... and not very helpful".

Britain's Local Government Association has estimated 108 British local authorities have 750 million pounds invested in Icelandic banks. London's police force, its transport network and charities across Britain also have investments with them.

Haarde said on Friday the British delegation would include people from the Treasury, the Bank of England, the Financial Supervisory Authority, the Financial Services Authority and the Financial Services Compensation Scheme.

Iceland has said officials from the Netherlands were also expected to arrive in the country on Saturday to discuss Dutch funds frozen in Icelandic banks. (Reporting by Brett Young)