CRISIS-HIT Iceland raised its key interest rate six points to 18 per cent yesterday in an attempt to rescue its enfeebled currency.

The announcement was presented yesterday as a condition of a $2 billion loan agreed on Friday with the International Monetary Fund (IMF) to woo back foreign capital into the starved economy.

Two weeks after cutting rates, the finance ministry said the policy reversal was a "temporary measure" necessary to support the krona.

The government in Reykjavik said yesterday it was seeking additional loans worth $4 billion from Nordic countries. "It's not a precise number, it's not a scientific number, but we are looking in that neighbourhood of $4 billion," said prime minister Geir Haarde.

He has declined to rule out a Russian offer of a €4 billion loan.

The interest rate hike will hit homeowners already facing dizzying rises in mortgage repayments and businesses facing wage payments in the coming days.

Hopes however that the rise in the interest rate would help the enfeebled Icelandic krona were short-lived yesterday. The currency plunged to Kr250 against the euro, a week after trading was effectively suspended at Kr152. Before the crisis began, a euro was worth about Kr80.

David Oddsson, the governor of the central bank of Iceland, said: "I have no doubt that high interest rates will be taxing for individuals and businesses, but it is important to support the currency through interest rates."

On Friday, the government announced that it had signed a loan deal with the IMF, the first such deal requested by a European country since Britain in 1976.

Details of the deal have been slow to filter out, increasing uncertainty on the north Atlantic island with a population of just 320,000.

After a decade and a half of debt-fuelled boom, the country was hit hard when the financial crisis left over-extended Icelandic banks with liabilities 12 times the island's GDP.

The government has nationalised the three major banks, writing off debts and leaving ordinary Icelandic customers unsure of their financial status.

"This is more bad news for everyone in Iceland with mortgages on their homes," said Kolbeinn Gudjonsson, a Reykjavik homeowner whose mortgage has spiked in recent weeks. "The talk of the town now is that the second IMF condition for the loan is to raise taxes, which would be even worse for people and companies here."