REYKJAVIK - ICELAND jacked up its key interest rate to 18 per cent and announced a request for help from the European Central Bank and the US Federal Reserve in twin moves on Tuesday to stave off national bankruptcy.

'Iceland's central bank sent a request to the ECB, the Fed and the Nordic banks on Friday,' Icelandic Prime Minister Geir Haarde told reporters in Helsinki where Nordic leaders were meeting.

Mr Haarde said Iceland had not yet received replies to its request.

Iceland's once booming financial sector has collapsed under the weight of the worldwide credit crunch, forcing the government to take control of the major banks as its currency has nosedived.

Reykjavik agreed with the International Monetary Fund last week on a loan of US$2.1 billion (S$3.17 billion) but Mr Haarde had said the country would need about US$4 billion more.

Iceland is hoping for 'a round figure in terms of US$4 billion of loans over four to five years,' he said on Tuesday.

The country has so far approached the four Nordic central banks in Denmark, Finland, Norway and Sweden, the ECB and the Federal Reserve.

Iceland's central bank said on Tuesday it had raised its key interest rate by 6.0 points to 18 per cent, the highest level in Europe.

'The board of governors of the central bank of Iceland has decided to raise its policy interest rate by 6 percentage points to 18 per cent,' the bank said, adding it would issue a statement motivating the decision later on Tuesday.

The announcement came as official statistics showed Iceland's 12-month inflation rate soared to a record high of 15.9 per cent in Oct from 14.0 per cent a month earlier.

The Icelandic currency, the krona, has meanwhile lost about 40 per cent of its value since the beginning of the year, making imports to the North Atlantic island more costly.

The combination of high inflation and a plunging currency means Iceland's 320,000 inhabitants risk not having access to consumption goods, which are largely imported.

The rate cut came less than two weeks after Iceland's central bank slashed its key interest rate by 3.5 points to 12 per cent to try to stimulate the economy.

Meanwhile, credit insurance group Coface said on Tuesday it had downgraded the ratings of Iceland, along with a number of other European countries, because of the worsening financial crisis.

'The credit crisis is spreading in Europe as the financial crisis worsens.

'This is leading to a major tightening up of banking credit, and a plunge in confidence by economic actors and a drop in activity,' Mr Coface said in a statement.

Mr Coface downgraded the rating for Iceland from 'A1' to 'A2' over the collapse of its banking system and switch into slump of its former booming property market.

The group forecast that the global credit crisis would continue for between 18 months to two years. Even if the world economy experienced a long phase of sluggish growth, 'businesses will adapt.' -- AFP