Dec. 3 (Bloomberg) -- Iceland’s central bank said it will end its daily foreign exchange auctions tomorrow, naming three market makers to determine the price of the krona.

“The exchange rate of the krona must be determined by supply and demand in the marketplace, and not by the sale of foreign exchange from the central bank’s reserves,” the Reykjavik-based Sedlabanki said today in a statement on its Web site.

Iceland’s foreign exchange market seized up after the country’s three largest banks collapsed in October. Since then, official trade in the krona has been limited to daily auctions, where the central bank is the sole provider of foreign currency. The krona traded at 187 per euro today, compared with 150 per euro on Oct. 15, when the auctions started.

Iceland’s parliament on Nov. 28 approved restrictions on foreign exchange flows to defend the value of the krona once trading restrictions were lifted. Foreign owners of krona- denominated securities can only sell their holdings by investing in other krona-denominated assets under the new rules.

“We do expect the krona to weaken as it is re-floated (with restrictions), although it will certainly appreciate in time as the current account surplus accumulates,” Landsbanki Islands hf said in a client note today.

Sedlabanki named NBI, New Glitnir and New Kaupthing as market makers and said it will probably name more. The three banks are the new, state-owned versions of Landsbanki Islands hf, Glitnir Bank hf and Kaupthing Bank hf, which collapsed under the weight of their debts in October.

“It cannot be ruled out that the central bank might participate in the foreign exchange market in the near future,” the bank said. “If the bank does so, it will be with the aim of controlling excessive volatility and not to support any particular exchange rate.”

Iceland got a loan from the International Monetary Fund worth as much as $5.3 billion last month and is now under the economic management of the Washington-based fund.

To contact the reporter on this story: Christian Wienberg in Copenhagen at cwienberg@bloomberg.net

Last Updated: December 3, 2008 12:33 EST