As serious as Iceland's economic situation already was, Britain -- its old friend, NATO ally and trading partner -- made it immeasurably worse, in the view of Iceland's government, its citizens and even some outsiders.
The troubles between the countries began three weeks ago when Britain took the extraordinary step of using its 2001 anti-terrorism laws to freeze the British assets of a failing Icelandic bank. That appeared to brand Iceland a terrorist state.
"I must admit that I was absolutely appalled," the Icelandic foreign minister, Ingibjorg Solrun Gisladottir, said in an interview, describing her horror at opening the British treasury department's home page at the time and finding Iceland on a list of terrorist entities with al-Qaida, Sudan and North Korea, among others.
"The immediate effect was to trigger an almost complete freeze on any banking transactions between Iceland and abroad," said Jon Danielsson, an economist at the London School of Economics. "When you're labeled a terrorist, nobody does business with you."
The Icelandic prime minister, Geir H. Haarde, accused Britain of "bullying a small neighbor," and said that the action was "very out of proportion."
And an online petition signed so far by more than 20 percent of Iceland's population said that the British prime minister, Gordon Brown, had sacrificed Iceland "for his own short-term political gain," thereby turning "a grave situation into a national disaster."
Iceland's financial problems had been brewing for some time. This fall, the government took over two of the country's three largest banks.
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