The UK Treasury is working on extending a loan to Iceland to protect British savers who have had money frozen since the government in Reykjavik seized the country's failing banks.

A delegation of Treasury and Bank of England officials is in talks with authorities in Iceland to resolve a dispute over who should compensate 300,000 British savers. Chancellor of the Exchequer Alistair Darling already has spoken to Icelandic Prime Minister Geir Haarde to resolve the spat."The aim of these discussions is to agree a mechanism where by the Icelandic government can honor its obligations to UK depositors and ensure the fair treatment of UK creditors," the UK Treasury said in an e-mailed statement in London yesterday.

Iceland needs aid from the UK, the International Monetary Fund and Nordic countries after the collapse of its banking system froze its foreign-exchange market, making it hard for importers to finance purchases. Glitnir Bank hf, Landsbanki Islands hf and Kaupthing Bank hf imploded with debts of $61 billion, 12 times the size of the economy.