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Iceland has nationalised its largest bank, Kaupthing, making it the third bank to be taken over by the government.

All domestic deposits are fully guaranteed, the government said in a statement from the country's Financial Supervisory Authority (FME).

"The action taken by the FME is a necessary first step in achieving the objectives of the Icelandic government and parliament to ensure the continued orderly operation of domestic banking and the safety of domestic deposits," the FME said.

According to the FME, Kaupthing's domestic branches, call centres, cash machines and internet operations will be open for business as usual.

Yesterday, the Treasury arranged for Dutch bank ING Direct to take over the deposits of Kaupthing Edge held by UK customers.

Iceland has now nationalised Glitnir, Landsbanki and Kaupthing.

Although the UK government has promised British savers who held accounts with the institutions that their money will be safe, it has emerged that many local councils are also depositors with the affected banks.