Iceland officially requests IMF help for crisis

REYKJAVIK (Reuters) - Iceland has officially requested financing from the International Monetary Fund, an IMF official said on Monday, part of efforts to combat a crisis that has overwhelmed its once-flourishing financial sector.

An IMF official, who asked not to be named, said the IMF executive board met at the weekend to discuss the request and that no amount had been agreed. A spokeswoman for Iceland's government said she could not confirm the official request.

Iceland was forced over the past week to take over three big banks, shut down its stock market and abandon attempts to defend its free-falling currency.

The north Atlantic island nation is also looking for help from new partners, and a central bank staffer said bank and finance ministry delegation left for Russia to begin talks on an emergency loan worth potentially billions of euros.

Ministers said Iceland should now consider joining the European Union to safeguard the economy -- a step that in the past has been blocked by the country's fishing sector.

In the past decade, Iceland had built a financial sector that brought unprecedented prosperity to its 300,000 people and made it a favorite with overseas savers and investors.

That came crashing down last week as Iceland fell victim to the crisis sweeping the world.

Trading in Icelandic shares was due to begin again on Monday but the exchange said it would now restart on Tuesday.

Iceland's crown currency was essentially untradeable on Monday and its true value impossible to calculate.

People began to feel the pinch as the central bank imposed tight restrictions on the use of foreign currency at home and capped Icelandic credit card use overseas.

Individuals can now only purchase foreign currency in Iceland on proof of a valid travel ticket overseas, and firms must apply to the central bank proving they want the money for essential foreign purchases such as food, fuel and medicine.

A five-person government delegation left for Moscow for loan talks, a move that has raised questions about Russia's motives and what price it might extract from Iceland, a NATO member.

A figure of 4 billion euros ($5.5 billion) was mentioned previously but the government says no deal has been nailed down.

EMBRACING THE EU

Ministers also talked about embracing the EU, a relationship Iceland has long been wary of.

Fisheries Minister Einar Gudfinnsson, who has opposed EU membership, said on local radio: "It's no secret, I've been against membership. However, the current turmoil means we have to look at every option."

Foreign Minister Ingibjorg Solrun Gisladottir said joining the EU and adopting the euro must now be a long-term ambition.

"In the short term, our defense is cooperation with the International Monetary Fund and in the long term EU membership, adoption of the euro and backup from the European Central Bank," she wrote in the daily Morganbladid.

A European Commission spokeswoman said that as a European country, Iceland was entitled to apply for EU membership.

The process could still take several years.

Diplomats said Iceland sent a delegation to Brussels last month to plead for a link between its currency and the euro but they were told only member states were entitled to protection.

Many islanders have wanted Iceland to adopt the euro but politicians have been cautious as that would mean joining the EU, forcing the vital fishing sector to make concessions and running contrary to Icelanders' independent streak.

Prime Minister Geir Haarde has said he was disappointed that other nations did not come to Iceland's aid in the past week, particularly in Europe. The cool response may have helped pushed Iceland toward Russia despite questions about the pay-off.

Haarde attacked the British government in the Financial Times on Monday, accusing Prime Minister Gordon Brown's government of "bullying a small neighbor."

Britain last week used anti-terror legislation to seize billions of pounds of failed Icelandic banks' British assets and accused the Reykjavik of acting irresponsibly.