REYKJAVIK, June 8 (Reuters) - Iceland is expected to propose on Monday the gradual lifting of capital controls imposed after its outsized banks collapsed in 2008, as the country seeks to draw a line under the crisis that left it out in the financial cold.
Such a move, which may include a tax on cash moved out of the country, is likely to draw criticism from foreign creditors who have assets trapped in the failed banks.
The North Atlantic island imposed controls on the movement of capital seven years ago after its three biggest lenders -- Glitnir, Landsbanki and Kaupthing -- folded under the weight of their debts as the global financial crisis unspooled.
With the banking sector's assets once calculated at 10 times Iceland's gross domestic product, their spectacular meltdown came to symbolise the greed and mismanagement of the global financial system and of governments' failure to police it.
After a late night debate in parliament on Sunday which closed down loopholes regarding transactions that can be made using money from the failed banks, the government will hold a news conference on plans for capital controls at 1200 GMT.
At stake are the equivalent of billions of dollars of foreign investment and debt recovered from the banks that have been frozen in Iceland -- and the country's fragile recovery.
The government estimated in March that creditors of the failed banks had about 500 billion Icelandic crowns ($3.75 billion), roughly a quarter of the country's GDP, in recovered assets that they would want to repatriate.
An amount equivalent to 15 percent of GDP invested by foreigners in Icelandic assets such as government bonds has also been frozen and authorities fear it too may be pulled out once controls are lifted.
The government and central bank have both argued that they need to lift controls in a manner that will not cause a massive outflow of investment, which would crash the crown currency and destabilise an improving economy.
To prevent such a stampede, politicians have talked of imposing a stability, or exit, tax of as much as 40 percent on money taken out of the country by creditors of the failed banks.
The creditors themselves object to such a proposal and a potential stand-off risks legal action that could last years and keep Iceland from returning to international financial norms.
The banks' collapse also infuriated some European countries which were left on the hook for billions of dollars in compensation to depositors, with Britain at one point even using anti-terrorism legislation against the country.
For Iceland, lifting capital controls would symbolise its rehabilitation after the crash. It should also help lift its credit rating and cut borrowing costs, opening the way for growth and a revival in living standards for its 330,000 people.
GDP exceeded pre-crisis levels for the first time last year, aided by the boost to competitiveness from the heavily devalued crown currency. (Editing by Catherine Evans)