Iceland's prime minister has insisted he and Gordon Brown can work together to end the banking crisis.

In an attempt to defuse a bitter row with the UK Government, premier Geir Haarde said he was co-operating "amicably" with the Treasury and said his country would "honour its obligations".

But he again refused to guarantee that British taxpayers hit by the collapse of the Icelandic banking sector would get their money back.

Mr Haarde was speaking after Treasury officials arrived in Reykjavik for talks to try to settle the dispute over £1 billion of local councils' cash and billions more from small investors.

It also emerged the Chelsea Building Society has £55 million invested in the troubled country, while charities are thought to have more than £120 million tied up.

The Iceland PM had reacted angrily over the use of anti-terror laws to freeze Icelandic banks' assets in the UK on Thursday, branding it a "completely unfriendly act".

But Mr Haarde struck a more positive note after receiving a letter from Mr Brown, saying: "We will now be able to start working together to find a solution. We will honour our obligations. We may need some support from UK authorities in order to do that in a proper way."

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