Guardian.co.uk

Iceland has agreed to pay compensation for some of the money lost by UK savers through the collapse of internet bank Icesave.

A statement from the Icelandic government said it would cover deposits in Icesave accounts in accordance with the rules governing banks in countries belonging to the European Economic Area (EEA).

The move means the Icelandic depositor protection scheme will repay the first ˆ20,887 (£17,844) that people lost when Icesave's parent company Landsbanki was nationalised in early October.

It is thought Iceland's pledge to pay out was key to the country securing a $2bn (£1.36bn) loan from the International Monetary Fund.

When Icesave was taken into receivership on October 8 it appeared that Iceland might be planning to compensate its domestic depositors but not foreign ones.

In response, the British government froze the assets of Icelandic banks in the UK and stepped in to guarantee all deposits in the bank from UK savers.

Although the UK government was only obliged to pay out any sums above those covered by the Icelandic scheme and up to £50,000, it said it would ensure no British savers lost money. Earlier this month it transferred £800m to the Financial Services Compensation Scheme (FSCS) to cover the cost.

The announcement came as the FSCS said it had begun to compensate Icesave's customers. The first savers received their money yesterday by bank transfer.

The FSCS said it had so far contacted 100,000 of Icesave's 230,000 customers, sending them emails inviting them to reclaim their money online.

It said payments worth a total of £250m had been initiated by the end of last week and it remained on track to compensate everyone by the end of the month.

The FSCS's chief executive, Loretta Minghella, said: 'Five weeks ago a lot of Icesave savers were worried that they were going to be left high and dry.

'Now they can be confident that the electronic process is underway and people are getting their money back.'

The FSCS said the Icesave emails were being phased for security and operational reasons and there was no set pattern in the ordering of emails.

Although customers can currently view their accounts, it asked people to wait for their second email before attempting to log on to complete the process.