Iceland's central bank is abandoning efforts to shore up the currency, the krona.
The financial sector verges on collapse amid the threat of national bankruptcy.
The central bank announced on Wednesday it would no longer try to prop up the krona, saying there was "insufficient support" for the exchange rate it set at 131 kronur to the euro on Tuesday.
The krona has lost half its value against the euro since the beginning of the year.
The announcement came two days after Prime Minister Geir Haarde presented emergency laws to save the island's financial sector and ward off national bankruptcy.
The measures allow the government to take control of all banks and financial institutions, take over assets, merge institutions and force institutions to declare bankruptcy.
The government has since nationalised two of the country's three biggest banks, Glitnir and Landsbanki.
Mr Haarde said on Wednesday that the Iceland's economic recovery would take "years."
Iceland, population 313,000, has an inflation rate of 14.5% and the central bank's main interest rate is 15.5% as a result.
