Iceland is refusing to honour a commitment to compensate British savers with money in a frozen online bank, but Britain will help them due to exceptional circumstances, the UK finance minister said today.

Icesave, the online British arm of Iceland's second biggest bank Landsbanki, announced on its website yesterday that its customers could no longer withdraw or deposit money, as Landsbanki itself was taken over by Icelandic authorities.

'The Icelandic government have told me, believe it or not, they have no intention of honouring their obligations there,' the Chancellor of the Exchequer Alistair Darling told BBC radio today.

But citing exceptional circumstances he said that the UK government have decided to 'stand behind those savers'.

UK press reports said more than 300,000 British customers had £4 billion deposited in Icesave accounts, which offer higher rates of interest than British banks.

Under regulations covering Icesave, if the online bank is declared insolvent, British account holders will be able to reclaim up to £50,000 each. However, the payouts are complicated as the Icelandic scheme should in theory pay the first £16,170 people lost, with a British scheme topping up the rest.