Iceland has become the first western nation to request a bail-out from the International Monetary Fund since the UK in 1976 as it seeks to restore confidence in an economy ravaged by the collapse of its banking system.

Geir Haarde, prime minister, said on Friday that the island had asked for a loan of $2bn (€1.6bn, £1.3bn) from the IMF and that this would be topped up with a multi-billion-dollar loan package from other Nordic countries and elsewhere to bolster foreign exchange reserves. The total size of the package is expected to be around $6bn.