The use of anti-terror powers to freeze billions of pounds of Icelandic bank assets in Britain is a distortion of the law's intent and risks further gumming up the ailing financial system, legal experts warned yesterday.

Financial crime lawyers said the government's un-precedented decision to apply the freezing order for purposes other than tackling terrorism opened the way to its use in other cases centred on commercial and political interests.

The Treasury's action on Wednesday to protect the deposits of British account holders has highlighted broader concerns that some security-related laws passed since the September 11 2001 terrorist attacks are so widely drafted they are open to abuse.

Martin Saunders, a partner at Clifford Chance, the law firm, said it was "surprising" the government was addressing an economic problem with "the kind of order issued against organisations like al-Qaeda".

The firm said that the Treasury order freezing an estimated £4bn of assets of Landsbanki, which went into receivership this week, could create a ripple effect of disruption on deals involving other institutions.

The freezing provisions applied to many assets other than account deposits, potentially affecting transactions involving instruments such as gold, securities and letters of credit.

Gareth Rees QC, a leading financial crime counsel, questioned whether use of the powers was justified even though "everyone is being urged to treat the present financial crisis as requiring a new approach".

He said: "Using powers clearly designed to combat terrorism in this commercial and political way seems to be stretching the meaning of this legislation beyond its intended limits."

It is the first time the Treasury has deployed the 2001 Anti-Terrorism, Crime and Security Act powers in a non-terrorist case, using the sweeping discretion the law offers to combat "action to the detriment of the UK's economy".

Lawyers say that this term is so widely drawn that it appears to offer support both to what the government did and to similar action in future situations involving troubled overseas institutions.

Asked if the government saw the Landsbanki case as constituting a kind of financial terrorism, one official responded wryly: "The question is: who are the terrorists?"

The Treasury stressed it had used the power as a precautionary measure to protect British retail depositors, as it was not clear whether Landsbanki could cover its obligations to them.

The order was temporary and officials were working "co-operatively and constructively" with the Icelandic authorities to resolve the situation.

The Treasury yesterday issued a licence allowing a partial relaxation of the order to allow businesses to access their accounts and other facilities with Landsbanki's London branch.

The government approach came under political fire, with Baroness Miller, Liberal Democrat home affairs spokesman, condemning it as "clearly a misuse" of the 2001 act.

"Although it may have been right to freeze the assets, it is appalling to use terrorism legislation for anything other than counterterrorism measures."

Her attack echoes criticisms of the broad application of official powers in areas such as surveillance, which can ordered by hundreds of authorities, including local councils, to safeguard "the interests of the economic well-being of the UK".

Stephen Grosz, the head of public law and human rights at Bindmans, the law firm, said that the Iceland asset freezing was another example of "function creep", under which the breadth of potential applications of an act meant powers adopted for one purpose could be deployed for another.

Liberty, the human rights group, declined to criticise the government's use of the anti-terrorism law, arguing that it seemed to fall under the umbrella of the "security" provisions referred to in the act's title.

Additional reporting by Jimmy Burns