(STOCKHOLM) - Sweden's central bank said Wednesday it would loan up to five billion kronor (514 million euros, 701 million dollars) to the Swedish branch of Iceland's biggest bank Kaupthing to provide liquidity.

"The Icelandic bank sector has for some time been under great strain. The conditions in the Icelandic bank sector have recently made it difficult also for Kaupthing Sweden to meet its payment obligations," the Riksbank said in a statement Wednesday, as Iceland's economy verged on collapse.

"In the situation that has arisen there is an imminent risk that the bank may suffer liquidity problems. To safeguard financial stability in Sweden and ensure the smooth functioning of the financial markets, the Riksbank has therefore decided to grant liquidity assistance to Kaupthing Sweden," it said.

The Riksbank said it believed Kaupthing Bank Sweden was solvent.

It deemed the bank was "suffering temporary liquidity problems, but that its solvency is not threatened," it said.

On Tuesday, the parent company Kaupthing Bank announced that it had received a 500-million-euro loan from Iceland's central bank to facilitate operations, while the government announced that it had nationalised the country's second-largest bank Landsbanki.

The country of just 313,000 people has seen its banks invest aggressively abroad in recent years, enabling it to experience ballooning prosperity and become one of the world's wealthiest nations.

However, soaring growth in the finance sector, whose assets represent eight times Iceland's gross domestic product, has made the island particularly vulnerable to the current global financial turmoil.

On Monday, Prime Minister Geir Haarde unveiled emergency laws to save the country's economy, including allowing the government to take control of all banks and financial institutions, take over assets, merge institutions and force institutions to declare bankruptcy.

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