Icelandic bank Kaupthing is suing the UK government over its handling of the stricken bank's UK subsidiary, Kaupthing Singer & Friedlander, in a legal action bankrolled by the Icelandic state, media reports said.

Lawyers for Kaupthing, formerly Iceland's largest bank, will file a lawsuit at the High Court in London today attacking the way in which Britain forced Kaupthing Singer & Friedlander into administration on 8 October last year. The lawsuit, which has the “full support” of the Icelandic authorities, including financial backing, comes after weeks of threats from Reykjavik.

Iceland took control of Kaupthing on 9 October 2008, the day after Kaupthing Singer & Friedlander was put into administration, and Reykjavik blames the UK for the collapse of the group. The action, prepared by Weil, Gotshal & Manges, an American law firm, will take the form of a judicial review, which allows individuals or businesses to challenge government decisions.

The investment management operations of KSF have been subsequently purchased by Williams De Broe, the UK-based investment house which is part of the London-listed Evolution Group.

Kaupthing's case is expected to focus on whether the Government's actions over Kaupthing Singer & Friedlander were allowed under the Banking (Special Provisions) Act 2008, the emergency legislation that was passed after the failure of Northern Rock, the UK lender, according to the Times (of London). If the High Court finds that the government acted unlawfully over Kaupthing Singer & Friedlander, it could set the stage for a separate multibillion-pound compensation case from Kaupthing.