Relations between Britain and Iceland sank to their lowest level since the 1970s cod wars last night after the forced nationalisation of the Nordic country's biggest banks put hundreds of millions of pounds of British deposits at risk, prompting Gordon Brown, prime minister, to threaten to seize the assets of Icelandic companies.

As Iceland's financial sector teetered on the verge of collapse following the nationalisation of its biggest bank, Kaupthing, yesterday, Geir Haarde, Iceland's prime minister, put some of the blame on "action taken against Kaupthing by the British government". Mr Haarde also criticised the British government for using anti-terror laws to freeze £4bn of Icelandic bank assets on Wednesday. "Not many governments would have taken that very kindly," he said.