UPDATE 3-Britain, Iceland make progress on Icesave deposits

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By Brett Young

REYKJAVIK, Oct 11 (Reuters) - Iceland and Britain said on Saturday they made significant progress in talks on frozen funds in collapsed Icelandic banks and agreed in principle on an accelerated payout to retail depositors in Icesave.

Talks between the two countries took place after a steep deterioration in relations this week as the financial crisis that has gripped the Atlantic nation dragged in European depositors and investors.

The talks on failed Landsbanki's online savings provider Icesave followed the seizure this week by Iceland's government of most of the country's banking system when it took control of Kaupthing, Landsbanki and Glitnir.

"Significant progress was made on retail depositors of Icesave with arrangements agreed in principle for an accelerated payout to depositors," the countries said in a joint statement.

While the statement mentioned individual investors, it made no reference to funds put into failed Icelandic banks by British institutions, such as local authorities and charities.

However, both sides said more talks would follow in coming days.

Around 300,000 British savers had accounts worth some 4 billion pounds ($6.91 billion) in Icesave, which suspended operations on Tuesday and stopped customers from withdrawing or depositing money. Previous estimates of British deposits had been 1 billion pounds.

Iceland's government said British officials had flown home on Saturday at the end of the talks, which both sides said were friendly, but that further discussions were planned.

A UK finance ministry spokesman said: "Discussions are still ongoing on resolving the position of (bank) creditors."

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.

As a result of Iceland's crisis, financial markets have ground to a halt with traders reporting hardly any trades in the crown currency and money markets. Its stock exchange remains shut until next week.

SHARP EXCHANGES

Sharp exchanges have flown between London and Reykjavik, reminiscent of the rancour of the 1970s "Cod Wars" when they clashed over the right to fish cod off Iceland.  Continued...