Iceland's central bank on Tuesday said it would hike its key interest rate from 12 to 18 per cent, after cutting the rates in mid-October, reproted dpa.
The central bank, or Sedlanbanki, said it was of "overarching importance to restore stability in the foreign exchange market and support the exchange rate of the krona."
The central bank had cut the rates from 15.5 per cent to 12 per cent on October 15.
The decision to raise interest rates again was in line with the terms of a recent agreement with the International Monetary Fund (IMF), the central bank said.
The deal signed on Friday was for a 2.1-billion-dollar emergency loan to help stabilize Iceland's economy.
The IMF board has yet to approve the agreement.
Iceland's foreign exchange market became "paralysed," after the recent collapse of Iceland's three largest commercial banks, the central bank said.
The policy rate was expected to be cut as inflation, currently at 15.9 per cent, weakens, the bank said.
Nordic prime ministers meeting in Finland on Monday and Tuesday said they were willing to offer loans to Iceland, but said the sums were to be determined by their respective central banks and pending the IMF deal.
The North Atlantic nation's Prime Minister Geir Haarde said Iceland needed an additional 4 billion dollars, and has said Reykjavik has also approached the European Central Bank (ECB) and the US Federal Reserve.
Danish Prime Minister Anders Fogh Rasmussen said that while his goverment was willing to back Iceland, the decision rested with the independent Danish central bank.
Norwegian Prime Minister Jens Stoltenberg said a deal with the IMF "will provide a platform that will make it easier for other countries to reach similar agreements."