A fortnight of talks ended in deadlock last week, but the sides have returned to the negotiating table to thrash out a deal.
Time is running out before a referendum takes place in Iceland on Saturday (March 6th 2010) on whether the state should foot the bill for repaying foreign investors.
With a 'no' vote thought to be likely â a move that could lead to the International Monetary Fund withdrawing its financial support of the Icelandic economy â an agreement is desperately being sought to avoid the complications that will be caused by the referendum.
Steingrimur Sigfusson, Iceland's finance minister, told the Financial Times: "It is very important that both sides keep lines open so we do not make this mess any bigger."
The prospect of a referendum was triggered in January after the country's president Olafur Grimsson refused to sign a parliamentary bill to repay the debts.
He said that it was important the people of Iceland had a say in the decision.
By Claire Archer