LONDON BRIEFING: THE CREDIT crunch hit home - hard - yesterday for some 300,000 British savers who had stashed their cash with Icesave, the online bank owned by Iceland's Landsbanki.

As the tiny nation teetered on the brink of financial ruin, the Icelandic government seized control of Landsbanki, the country's oldest and second-largest bank, and Icesave customers found themselves unable to get into their accounts.

Since it launched its ambitious assault on the British savings market almost two years ago, more than £4 billion of funds have flooded into Icesave from savers keen to take advantage of its top- of-the-table rates.

Now those funds are frozen and British customers face what threatens to be a lengthy and complex process to recover their cash.

While the Icelandic government has followed Ireland's lead in offering domestic customers a 100 per cent guarantee for their money, this does not apply to British savers. Instead, they are covered by the British bank compensation scheme, which is pegged at £50,000 - and they will have to reclaim the first £16,000 of this from the Icelandic government.

A spokesman for the online bank stressed yesterday that 95 per cent of customers had deposits of less than £50,000 and so would be fully protected by the British scheme. Such is the parlous state of Iceland's finances, however, that there can be no certainty that it will be able to honour its commitment to overseas savers.

If Iceland should be unable to meet compensation claims, it is not clear if the British government will be prepared to step in for all savers. At the moment, it appears that the British scheme will cover amounts between £16,000 and the £50,000 limit, but those below the £16,000 threshold supposedly protected by the Icelandic scheme could, in the worst-case scenario, receive nothing.

All in all, another nail in the coffin of Britain's battered banking sector, where shares crashed still further yesterday as the markets waited for some word of confirmation from the Treasury that it is preparing a radical £50 billion rescue scheme.

The sudden and dramatic implosion of Iceland's financial system has not only put billions of pounds of British savings at risk but also threatens to send shockwaves through the already struggling British retail sector.

After a decade of aggressive expansion, Icelandic entrepreneurs have built up sizeable stakes in more than a dozen High Street retailers, including household names such as Woolworths, Debenhams, House of Fraser, French Connection and Moss Bros.

Icelandic interests also own a number of retail chains outright, including food retailer Iceland, Hamleys toy store and, in fashion, Karen Millen, Oasis, Warehouse and Principles. The stresses of the global credit crunch on Icelandic investors have already been felt by one British retailer - it was the refusal of 49 per cent shareholder Arev to stump up more funds a fortnight ago that forced royal couturier Hardy Amies to the brink of bankruptcy.

Baugur, the best-known of the Icelandic raiders, has insisted that its High Street interests are safe and that it will not be pushed into a forced sale of its British assets in order to repatriate funds. The bulk of Baugur's funds are provided by international banks, it stresses.

However, so rapid is the pace of the escalating crisis, both in Iceland and throughout the world, Baugur's reassurance has done little to calm nerves in a retail sector already facing what threatens to be its worst Christmas in 30 years.

The corporate insolvency firm Begbies Traynor predicts a spate of collapses in the new year, when banks will be forced to pull the plug. It says it currently has more than 300 British retailers on its "critical" list, defining critical as a 70 per cent chance of failure.

The banks will mostly wait until the new year to give the retailers a chance to turn things round but also to maximise the amount they are likely to recover.

Meanwhile, the clamour for an interest rate cut tomorrow is now almost deafening. The Bank of England's monetary policy committee begins its two-day meeting to set rates today and will deliver its decision at midday tomorrow.

Having left rates at 5 per cent for the past six months, the committee is now being urged to slash rates not by its traditional quarter of a percentage point, but by 50 basis points, and to follow that up with further cuts in November and December.

As the dire economic data has piled over recent weeks, the bank is increasingly coming under fire for its concentration on the fight against inflation rather than the need to ease what threatens to be a deep and long-lasting recession.

Even if it does heed the calls for decisive action on rates - and some economists are predicting that they could ultimately halve to 2.5 per cent - Britain will be unable to avoid recession. It's now a case of how long and how harsh that recession will be.

Fiona Walsh writes for the Guardian newspaper in London