Reykjavik - Cash-strapped Iceland was set to allow its currency to float as soon as the country secures new loans, Prime Minister Geir Haarde said Thursday in parliament.

Haarde further said the cost of the collapse of the North Atlantic nation's banks may total the equivalent of some 9.4 billion dollars or "85 per cent of GDP" last year.

A week ago, Reykjavik signed a 2.1-billion-dollar emergency loan with the International Monetary Fund to help stabilize Iceland's economy.

Earlier this week, Haarde said Iceland needed a further 4 billion dollars in loans.

Meanwhile, the Danish home-ruled Faroe Islands that share close historic and cultural ties with Iceland have offered a 300-million- kroner loan (50 million dollars), the Icelandic government said.

The central bank on Tuesday raised its key interest to 18 per cent, after cutting the rates in mid-October. The hike was in line with the terms of the recent IMF agreement.

Iceland's foreign exchange market became "paralyzed," after the recent collapse of Iceland's three largest commercial banks, the central bank said. (dpa)