REYKJAVIK, Iceland (AP) — Iceland's financial turmoil boiled over into a full-blown diplomatic spat yesterday as the Nordic nation protested Britain's decision to protect British depositors by freezing the assets of collapsed Icelandic banks under anti-terrorism laws.

Prime Minister Geir H. Haarde called the move a "completely unfriendly act" and blamed Britain in part for Iceland's decision to take control of the country's largest bank — the third to be placed under its protective umbrella — yesterday.

British Prime Minister Gordon Brown told business leaders that the attitude of the Icelandic government was "totally unacceptable" and later refused to apologise for his actions.

The collapse of all three of Iceland's major banks has had a heavy impact in Britain, where tens of thousands of private savers have accounts worth millions of pounds with branches or subsidiaries of those banks.

Making matters worse, some 82 British local government have invested hundreds of millions of pounds worth of taxpayers' money in Icelandic banks, taking advantage of relatively high interest rates compared to other countries' A-rated banks.

"The responsibility is on the Icelandic authorities. They should pay back that money, they are liable for it," Brown told Sky News television. "We expect them to honour their obligations."

In an effort to protect British deposits after inaction by the Icelandic government, Brown invoked powers under the Anti-Terrorism Crime and Security Act 2001 to freeze the British assets of Landsbanki, the Icelandic bank put into receivership this week.

"I don't apologise for it," Brown said, adding that Britain was concerned that money had been transferred from the accounts out of London to Iceland a few days ago.

"This is a very unusual situation, where a country has effectively defaulted," he said.

In Iceland, Haarde said he told British Treasury chief Alistair Darling in a phone call that Iceland considered Britain's move done under anti-terrorism laws "to be a completely unfriendly act".

"I'm afraid not many governments would have taken that very kindly, to be put into that category," he told reporters.

Haarde added that the Britain — which has also threatened to sue Iceland to recover the lost deposits of Britons who hold accounts with IceSave, the online arm of Landsbanki — was behind Iceland's decision to take control of Kaupthing bank yesterday.

"This is something that happened partly as a result of action yesterday taken against Kaupthing by British authorities," he said. "We were hoping that Kaupthing would be able to survive this crisis, continue as a fully functioning private bank."

Haarde said that a "number of issues were cleared up" during his conversation with Darling and noted that the British government subsequently issued a licence exempting certain activities from the freeze order on Landsbanki.

Britain's Treasury office said it made the changes, which will allow funds to flow into Landsbanki's frozen accounts in Britain and allow business to access accounts with the London branch, so the action against the bank would not "adversely affect third parties".

Haarde said that the changes to the order were "very important to safeguard the interests of importers and exporters".

He also noted that Icelandic institutions employ some 100,000 workers in Britain, most of them British.

Haarde said that Britain would now send a small team to Reykjavik to thrash out concerns about the crisis.

He added that Darling and his Icelandic counterpart Arni M. Mathiesen would talk over the weekend in Washington DC where they are both attending a meeting of the IMF.