Reykjavik - Iceland that has been severely battered by the global credit crunch Thursday welcomed emergency loans approved by the International Monetary Fund (IMF) and Nordic neighbours.

Nordic neighbours of the cash-strapped North Atlantic nation earlier Thursday said they have approved a 2.5-billion-dollar loan, supplementing a similar IMF loan.

The Nordic announcement came the day after the executive board of the IMF approved a two-year 2.1-billion-dollar loan after a tentative deal was clinched last month.

Reykjavik said it would use the IMF funds to support its currency, the krona, "which will be floated as soon as possible."

Prime Minister Geir Haarde said the loan from the IMF was "an important step forward towards the rebuilding of our economy. With the IMF agreement in place, we can commence our recovery program with full force and bring our economy back on track."

Iceland has also received loans from Russia, Poland and the Faroe Islands, the government said.

The finance ministers of Denmark, Finland, Norway and Sweden said "implementing the IMF programme will not be easy," but they believed it could help rebalance Iceland's economy.

The Icelandic central bank, or Sedlabanki, recently raised interest rates to 18 per cent and has said it aims to continue to keep tight control of monetary flows.

In Washington, the IMF said Wednesday the standby arrangement was structured so that Iceland could immediately draw about 827 million dollars, with the rest in eight installments of about 155 million dollars - to stabilize a "banking crisis of extraordinary proportions."

The global financial crisis sparked the collapse of three of Iceland's major banks and a rapid depreciation of the krona.

The nation is facing a severe recession through 2010, the fund said in a statement.

The IMF forecast that Iceland's economy would be badly damaged, with real gross domestic product (GDP) falling 9.6 per cent next year after an expected 1.6-per-cent advance in 2008.

It estimated that the unemployment rate would quadruple to 5.7 per cent next year.

However, once confidence is restored and balance sheets readjusted, the IMF predicts domestic demand to rebound strongly in 2011.

"Iceland's long-term growth prospects remain favourable, buttressed by its very strong fundamentals of a highly educated labour force, a favourable investment climate, and a rich natural resource endowment," said John Lipsky, the IMF's first deputy managing director, in a statement. (dpa)