STOCKHOLM/REYKJAVIK - The Icelandic central bank abandoned efforts to defend the country's currency on Wednesday and the government seized control of a second big bank as the global financial storm battered the island's economy.

Prime Minister Geir Haarde said Iceland had not asked for help from the International Monetary Fund, which has sent a delegation to Reykjavik on a fact-finding mission.

But he said assistance from the Fund was "definitely an option" and separately said negotiations to secure a 4 billion euro ($5.45 billion) loan from Russia would begin next Tuesday.

"I'd like to underline that we have not, at this point at least, asked the IMF for a standby facility or an economic programme," Haarde told a news conference.

With two of the island's biggest banks now under state control, the market is focused on top bank Kaupthing to see if it can weather a crisis that threatens Iceland's entire banking system.

Kaupthing was forced to take an emergency loan from Sweden on Wednesday for its Swedish unit, which has been put up for sale. The bank's shares dived in Stockholm by 34 percent before they were suspended.

The Swedish central bank said it would lend the Swedish arm of Kaupthing up to 5 billion Swedish crowns ($702 million).

The Icelandic crown, hammered in recent days, plunged again and the central bank abandoned a two-day attempt to hold it at 131 per euro -- what Commerzbank called "the shortest peg in history".

"It has become clear that this rate has insufficient support. The bank will therefore make no further attempts in this regard for the time being," the central bank said.

In late European trade, the crown recovered and was being quoted by Icelandic banks back around 131.60, up 14 percent from the U.S. close. But traders said the market was barely functioning and no real business was being done.

BOOM AND BUST

Home to just 300,000 people, the North Atlantic island epitomised the global credit boom that went bust 15 months ago. Its banks expanded dramatically overseas, investors took large positions in its high-yielding currency and foreign firms poured money into local projects.

Now facing financial meltdown, Iceland has taken over two of its largest banks -- first Landsbanki on Tuesday and then Glitnir on Wednesday -- and has had to go cap in hand to other nations.

"We will do whatever it takes to protect our interests," Haarde said. "We will seek help if needed."

Later, speaking in a joint interview with news agencies, he sounded a contrite note after what has been a harrowing few days for the country.

"What we have learned from this whole exercise over the last few years is that it is not wise for a small country to try to take a leading role in international banking."

Journalists have descended on Iceland in large numbers to report the saga, with reporters and camera crews outnumbering customers at some bank branches.

"The situation is rather serious and quite scary and we just have to let these days pass and hope for the best," Sveinn Andri Sveinsson, a 45-year-old lawyer, told Reuters.

The financial regulator said Glitnir's operations in Iceland would be open for business as usual and domestic deposits were guaranteed. Glitnir said it would sell its Swedish unit and its Finnish arm was also up for grabs.

Meanwhile, ING Direct, the online banking arm of ING Group, said it was acquiring more than 3 billion pounds ($5.3 billion) of British deposits from Icelandic online savings providers IceSave, owned by Landsbanki, and Kaupthing Edge.

But tension between Iceland and Britain emerged because savers of Icelandic banks in Britain have been put at risk.

"We are taking legal action against the Icelandic authorities," British Prime Minister Gordon Brown told a news conference, as he announced the UK's own bank bailout.

The British Treasury said a Kaupthing unit in Britain had been put into administration to protect retail depositors, while Haarde said the two countries would review the situation for Icesave. He said there was a good chance Landsbanki's assets would cover the deposits of British savers in Icesave.

Haarde said Iceland was determined not to let the crisis overshadow its friendship with Britain.