Iceland's banks face a battle for survival Tuesday after government introduced emergency legislation to give itself sweeping new powers over its collapsing financial sector.

The global financial crisis has laid waste to some major banks and other financial institutions in the United States and Europe, but Iceland may be the first country to face the prospect of going bust along with them.

After a decade-long binge in which Iceland’s banks, and some of its citizens, expanded beyond their means, the bill has come due. While the full effects of the potential crash have not hit yet, some Icelanders like Bubbi Morthens are already feeling the pain.

Millions of pounds invested in troubled Icelandic banks by local authorities in Sussex and Surrey will not affect frontline services, councils have said.

“There is a lot of fear in society and there are people who are losing everything,” Mr. Morthens said Wednesday after singing at an impromptu midday concert in central Reykjavik intended to lift people’s spirits.

Mr. Morthens is a former fish industry worker turned rock singer who is now known as the Elvis of Iceland. Like many of his compatriots, he did well when Iceland was riding high, accumulating considerable wealth.

Then, the financial crisis gripping his country intensified last month. The government seized control of Iceland’s third-largest bank. Mr. Morthens said he lost his life savings, which he had invested mostly in the bank’s stock.

The government's attempt to gain control of the increasingly dire situation and restore some confidence in the country's hard-hit banking sector followed a day of panic Monday that saw trading in shares of major banks suspended and the Icelandic krona shrink in value against the euro.

Iceland is paying the price for an economic boom of recent years that saw its newly affluent companies go on an acquisition spree across Europe and its banking sector grow to dwarf the rest of the economy. Bank assets are nine times annual gross domestic product of 14 billion euros ($19 billion).

More than 90 councils in England and Wales have invested in troubled Icelandic banks. Surrey County Council confirmed it had previously tried to withdraw its £20m investments in two Icelandic bank. West Sussex Council said it had £12.9m in Heritable, the UK arm of Landsbanki.

Michael Gosling, the council's executive member for resources, said the banks had had "long-term credit ratings of high, excellent or exceptional and met strict lending criteria" at the time of investment . He said: "We attempted to remove our investment prior to the current situation, however as we were tied into a deposit period of up to two years, we were unable to do so.

"We are awaiting confirmation from the government to see what arrangements have been made to protect the investments and would expect the same guarantee that Alistair Darling has given to the UK's banks."

“What is important at a time like this is not picking out whom to blame,” he said. “We have a government that is trying to do their best, but we will have to see what they come up with. Maybe it is a new dawn for Iceland.”

The government’s attempts to get ahead of the problems cascading through its financial system have not restored confidence. In just 24 hours, for instance, it abandoned an effort to peg its currency to a basket of others.

Part of problem is that Iceland's tiny size has led to a high level of cross ownership of assets between banks and companies, which creates a house of cards scenario.

In that eventuality, the central bank with its liquid foreign assets of just 4 billion euros ($5.5 billion) will be hard pressed to make any more bailouts — the big four banks have combined foreign liabilities in excess of 100 billion euros ($137 billion).

Those concerns led all the major credit ratings agencies to downgrade Iceland's sovereign, or government, credit rating last week.

In a country raked by icy North Atlantic winds and dotted with volcanoes and geysers, where people live with the threat of earthquakes and maritime disasters, few seem to be losing their cool over the financial crisis — yet.

Still, with the country facing the imminent threat of “national bankruptcy,” as Prime Minister Geir H. Haarde put it earlier this week, many people are talking about an epochal change. The only problem is that nobody knows what that might mean.

Nations have gone bankrupt before, of course, but countries like Argentina — not a country that thinks of itself as closer to Europe than the developing world.

What it means for Iceland so far, people here say, is that the days when the economy seemed capable of gravity-defying feats are gone. So are the days when Icelandic investors went on an international buying spree, adding some of the biggest names of the British and American retail industries to their portfolios.

So too, they conclude, are the days when ordinary citizens effortlessly joined in the fun, taking out second mortgages to finance their own trips abroad or at least to the Laugavegur, the main shopping strip in Reykjavik.

“It’s difficult; the landscape is very difficult,” said Franch Michelsen, a watch dealer in downtown Reykjavik, as he took a break from cleaning his shop window on Wednesday.

People are still buying watches costing up to 100,000 Icelandic kronur, or about $900, he said. Above that price, there is a flight to quality similar to the one that has galvanized the financial markets. Buyers are apparently interested only in the biggest name, the most liquid investment, Mr. Michelsen said — in this case, Rolexes.

“People want something they can take anywhere in the world and sell it,” he said.

This capital city of 120,000 still displays the fruits of the decade-long economic boom that followed the deregulation of Iceland’s financial sector in the 1990s — hip cafes, lobster restaurants and stylish shops selling outdoor gear.

After the government nationalized Mr. Morthens’s bank, Glitnir, in September, some people rushed to grocery stores, worried about possible shortages on a remote island where fish is one of the few foods that does not need to be imported.