Iceland and a group of EU countries have agreed on a negotiating framework to settle a row between the island and Britain over compensating savers, the government in Rejkjavik said Sunday.

British clients of Icesave, a subsidiary of Iceland`s second biggest bank Landsbanki, had their accounts frozen when the bank ran into liquidity problems and was nationalised in early October.

The British government then used anti-terrorist legislation to freeze the assets in the United Kingdom of Icelandic banks to protect thousands of British savers, both individuals and local authorities, to the fury of the Icelanders.

`Talks between Iceland and several EU member states, initiated by the French EU presidency, led to a common understanding that will form the basis for further negotiations,` a statement in Reykjavik said.

`According to the agreed guidelines, the government of Iceland will cover deposits of insured depositors in the Icesave accounts in accordance with EEA (European Economic Area) law.

`They also entail that the EU, under the French presidency, will continue to participate in finding arrangements that will allow Iceland to restore its financial system and economy.`

The row, mirrored by another between the island and the Netherlands, was at the root of a blockage of aid to Iceland, which is not a European Union member.

But on Saturday International Monetary Fund managing director Dominique Strauss-Kahn said the fund`s members had reached agreement on a loan to Iceland, which will be voted on by the governing board on Wednesday.