TENS of thousands of savers with Icelandic-owned Kaupthing Edge and Heritable Bank have been thrown a lifeline, after ING Direct agreed to buy the savings books of the stricken banks.

The deal, backed by the UK government, saw it acquire £2.5 billion in deposits and 160,000 customers from Kaupthing Edge, the UK retail arm of Iceland's largest bank.

It has also taken control of £538m of savings held by 22,200 people with Heritable Bank, owned by Landsbanki, Iceland's second largest bank which has gone into receivership.

Johan de Wit, chief executive of ING Direct UK, said: "We are very pleased to have been able to take such rapid and decisive action that has provided Heritable Bank's customers, and those of Kaupthing Edge, with the reassurances they need. We are working to rapidly ensure that it is business as usual for all customers."

Heritable's savers had been left uncertain about whether they had lost their life savings after their deposits were frozen yesterday when Iceland's financial regulator took control of Landsbanki.

The deal means that Heritable customers will be able to access their savings through ING Direct and won't be forced to seek compensation.

A statement for the Treasury said: "Heritable's retail deposit business has been transferred to ING Direct, a wholly-owned subsidiary of ING Group. This is the right course of action to protect savers, ensure financial stability and safeguard the interests of the taxpayer."

The ING deal was announced hours before Kaupthing Singer & Friedlander (KSF), which holds the deposits of Kaupthing Edges UK customers, was put into administration. Banking experts said that the transfer to ING Direct will give savers more confidence that their money is safe.

Darren Cook of Moneyfacts, the financial website, said: "This is good news for Kaupthing's savings who have been concerned that they would have to seek compensation if it went to the dogs. "

Analysts said that the deal marks the end of a short-lived but dramatic assault on the UK savings market by the Icelandic banks, which began when Landsbanki bought Heritable Bank, a small private bank set up in Glasgow, in 2000. More than 400,000 UK savers were tempted into Icelandic banks in the intervening years by the promise of higher interest rates and a more customer friendly approach than traditional UK banks.

This included around £5 billion deposited by 300,000 savers in Icesave, also owned by Landsbanki. Icesave depositors are not part of the ING deal. However, the Treasury confirmed today that, in the event of a default, it will guarantee the deposits of all UK retail savers with Icesave, even if these deposits are worth more than £50,000.

Mr Cook said: "Although this will mean there is less competition in the savings market all savers care about at present are stability and confidence."

ING Direct UK is a subsidiary of Netherlands-based ING Group. Following the transfer, savings of up to EUR100,000 (£78,000 of deposits) held with Kaupthing or Heritable will be protected by the Dutch government

ING operates under the passport system of financial compensation, which requires UK savers to seek compensation from a foreign country first in the event of a banking collapse. If there is a shortfall between the payment from the overseas scheme and the £50,000 guaranteed by the UK government, savers receive the difference from the Financial Services Compensation Scheme.

As the level of compensation offered by the Netherlands is higher than in the UK, in ING's case the entire amount would have to be sought from the Dutch government.