Iceland requests $2 billion from IMF to rescue economy

By Sakari Suoninen and Omar Valdimarsson

REYKJAVIK (Reuters) - Crisis-struck Iceland called on the International Monetary Fund for $2 billion (1.255 billion pounds) in aid on Friday to help fix a broken banking system, restart currency trading and soften the blow from a withering economic downturn.

The Washington-based lender said its staff in Reykjavik and Icelandic authorities had reached agreement on an economic programme that would be supported by the financial assistance.

"The goal is to restore faith in the Icelandic economy and stabilise the currency and restructure the banking system," Prime Minister Geir Haarde told a news conference broadcast on national television.

The deal still needs to be approved by the IMF board and Haarde said he expected it would take about 10 days for the review to take place.

Iceland's financial system has all but collapsed and its economy is suffering badly after the country was forced to take over three of its biggest, debt-laden banks this month.

Paul Thomsen, head of an IMF mission in Iceland, said the economy could contract as much as 10 percent next year.

The north Atlantic island of just 300,000 people has become the first national victim of a global crisis that has felled some of the biggest names on Wall Street and sparked panic in financial markets.

International trade in Iceland's krona (crown) has ceased, a nasty dispute has broken out with Britain over deposits held in Icelandic accounts and the country has begun a wide search for assistance.