(REYKJAVIK) - Iceland and a group of EU countries have agreed on a negotiating framework to settle a banking row between the island and Britain over compensating savers, the government in Reykjavik said Sunday.

British clients of Icesave, a subsidiary of Iceland's second biggest bank Landsbanki, had their accounts frozen when the bank ran into liquidity problems and was nationalised in early October.

The British government then used anti-terrorist legislation to freeze the assets in the United Kingdom of Icelandic banks to protect thousands of British savers, both individuals and local authorities, to the fury of the Icelanders.

"Talks between Iceland and several EU member states, initiated by the French EU presidency, led to a common understanding that will form the basis for further negotiations," a statement in Reykjavik said.

"According to the agreed guidelines, the government of Iceland will cover deposits of insured depositors in the Icesave accounts in accordance with EEA (European Economic Area) law.

"They also entail that the EU, under the French presidency, will continue to participate in finding arrangements that will allow Iceland to restore its financial system and economy."

The row, mirrored by another between the island and the Netherlands, was at the root of a blockage of aid to Iceland, which is not a European Union member.

But on Saturday International Monetary Fund managing director Dominique Strauss-Kahn said the fund's members had reached agreement on a loan to Iceland, which will be voted on by the governing board on Wednesday.

He did not say how much the loan was for, but earlier reports said the Nordic country was seeking about two billion dollars.

In Britain, the Treasury said it had not seen the detail of the agreement but welcomed any progress in resolving the problem. However, it stressed local authorities and charities with savings in Icesave must be part of any deal.

"The UK government has always supported an IMF loan for Iceland and welcomes any progress that would see resolutions for British retail depositors and equal treatment for all creditors," the spokesman told AFP.

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