Reykjavik  - The central bank of Iceland on Thursday said it would guarantee payments in an effort to restore confidence in the Icelandic banking system amid a global credit squeeze that has disrupted payments to and from the North Atlantic nation.

The central bank, Sedlabanki, said it "guarantees" that the funds "will reach the ultimate beneficiaries' accounts."

Last week, the government in Reykjavik nationalized the country's three largest banks, which have run up liabilities at least five times that of Iceland's gross national product in recent years.

Over the weekend, representatives of Iceland, Britain and the Netherlands discussed the repayment of foreign deposits frozen in the three Icelandic banks Landsbanki, Glitnir and Kaupthing.

Prime Minister Geir Haarde told parliament he was "hopeful" that a deal would be reached with Britain over the deposits.

In his remarks to parliament Wednesday, Haarde repeated his criticism of how Iceland was treated by Britain over the financial crisis.

Iceland has hired "a British law firm, which is now working to prepare a case" against the British government, he added.

As part of efforts to restore Iceland's economy, the premier said discussions have been held with the International Monetary Fund (IMF), and he also promised a review of the events leading to the collapse.

Earlier, the central bank said it was set to continue talks with Russia over a loan to ease its financial situation.

During the two-day talks in Moscow that ended Wednesday, delegates from the Icelandic Finance Ministry and central bank met with, among others, Russian Deputy Finance Minister Dimitri Pankin.

Pankin said in the joint statement there was need for "further exploration of the issues before we can reach a final decision."

Iceland earlier has mentioned the sum of 4 billion euros (5.4 billion dollars).

The Icelandic central bank on Wednesday lowered key interest rates from 15.5 to 12 per cent. (dpa)