Iceland raised its trendsetting lending rate by six percentage points Tuesday in a desperate attempt to attract foreign cash and boost its ailing currency.

The Bank of Iceland hiked its policy rate to an eye-popping 18 per cent, up from an already lofty 12 per cent.

The central bank said it needed to raise borrowing costs significantly in order to give some sort of support to the krona, the Icelandic currency.

"It is of overarching importance to restore stability in the foreign exchange market and support the exchange rate of the krona. Although the real exchange rate is currently much lower than is justifiable for the long term, it is considered unavoidable to provide the krona with a firmer footing on the foreign exchange market through a restrictive policy rate as current restrictions are gradually removed," the bank said in a statement.

As well, hiking interest rates was part of an agreement with the International Monetary Fund in order to borrow $2 billion US from the international organization.

Icelandic Prime Minister Geir Haarde said his country was seeking another $4 billion from the Nordic countries.

Since the September financial crisis began, Iceland has been forced to bail out major banks and has seen its currency collapse.

The krona has lost approximately 50 per cent of its value compared with the U.S. dollar since August.

The central bank is hoping the higher interest rates will attract foreign capital into the tiny northern country or at least keep domestic cash in Iceland.

Iceland is hiking rates at the same time the U.S. Federal Reserve and other major western banks appear ready to cut borrowing charges.

Analysts, however, said the countries face different problems.

The United States and Canada are attempting to fend off a recession, while Iceland is grappling with a run on its currency that could kill the country's ability to trade, a situation this country of 300,000 people can ill afford.