WASHINGTON, Nov 19, 2008 (AFP) - The International Monetary Fund announced Wednesday that its executive board approved a loan of 2.1 billion dollars for Iceland to help the country rebound from a dire financial crisis.

The two-year loan, accompanied by quarterly reviews, was designed "to support the country's program to restore confidence and stabilize the economy," the IMF said in a statement.

It was the first time a country in Western Europe had secured a loan from the IMF since Britain in 1976.

The three main banks, accounting for about 85 percent of the banking system, collapsed within a time span of less than one week," John Lipsky, acting chairman, said in the statement.

With Iceland "facing a severe recession," the IMF loan had the goal of stabilizing the exchange rate, developing a strategy for the restructuring of banks and ensuring "medium-term fiscal sustainability," Lipsky said.

The IMF move makes 827 million dollars immediately available and the remainder of the loan would be paid out in eight installments of 155 million dollars, according to the statement.

The two-year "stand-by arrangement" was approved by the executive board under fast-track emergency rules.

Lipsy said Iceland faced serious challenges but that it had promising long-term economic prospects, citing its educated work force and rich natural resources.

"The road ahead is difficult. The program is subject to exceptionally large uncertainty and significant risks, reflecting the unprecedented magnitude of the banking sector collapse," he said.