The UK Government will back Icelandic bank Landsbanki’s UK Icesave depositors, Chancellor Alistair Darling told the BBC this morning.

Putting an end to a night of worry faced by more than 200,000 UK savers, Darling stepped in with the welcome news that deposits in closed Icelandic bank Icesave will be compensated.

Prior to this announcement, Brits with cash in Icesave feared the worst as the compensation system means that Iceland would be their first port of call for amounts up to €20,887. The gap between this and the UK’s £50,000 guarantee would then be made up by the UK Financial Services Compensation Scheme (FSCS).

However, as the entire Icelandic banking system went into meltdown yesterday, savers feared that amounts in savings accounts under €20,887 or over £50,000 would not be paid back.

And, it seems Icesave’s UK savers were right to worry, Darling told the BBC, “The Icelandic Government, believe it or not, have told me yesterday they have no intention of honouring their obligations here.”

However, the Chancellor has now guaranteed all UK Icesave deposits, even amounts above the £50,000 UK guarantee. However, Darling made it clear that such actions have only been taken due to the ‘exceptional circumstances’ surrounding the collapse of Landsbanki’s Icesave and Iceland’s compensation scheme.

Commenting on the relief this will bring to UK Icesave customers, chartered financial planner at Fairinvestment.co.uk, Sharon Bratley, said: “I imagine the news will be a welcome end to a sleepless night for Icesave savers. Their money is now safe, however, Iceland had a responsibility, and its failure to compensate UK savers cannot go ignored.”

According to the BBC, Gordon Brown intends to address this issue by taking legal action against Iceland for failing to guarantee savers’ deposits.

Darling is expected to make a statement to the House of Commons later today.