Icelandic police have detained the former chief of failed bank Landsbanki and another senior executive as part of a probe into alleged crimes in the lead-up to the bank's collapse, the special prosecutor said on Friday.

A municipal court judge would decide at around 1400 GMT whether to keep the executives in detention on suspicion of market manipulation ahead of the financial meltdown that hit the island's economy, prosecutor Olafur Thor Hauksson told Reuters.

The two executives being held by police are former Landsbanki Chief Executive Sigurjon Arnason and Ivar Gudjonsson, the former head of the bank's investments arm.

Hauksson, the former sheriff of a small town outside Reykjavik, has been investigating alleged crimes in the lead-up to Iceland's bank collapse, such as market manipulation, insider trading and cases of loan approvals without sufficient collateral. No cases have yet been brought to trial. Landsbanki and the North Atlantic island's other main commercial banks collapsed in October 2008 under the weight of huge debts amassed over years of aggressive overseas expansion, shattering the financial system and Icelandic currency. Hauksson said this week he was questioning seven former Landsbanki executives after searches were carried out at three buildings in Reykjavik, in an investigation of alleged large-scale market manipulation and fraud.

Three other ex-Landsbanki executives -- former chief corporate accountant Elin Sigfusdottir, former brokerage head Steinthor Gunnarsson, and former chief of securities Yngvi Orn Kristinnsson -- were also taken in for questioning by police on Thursday but were released. Hauksson opened the investigation into Landsbanki's spectacular collapse last October. The bank was one of Iceland's three main banks that all went belly-up in October 2008, and were taken over by the country's financial supervisory authority (FSA). The FSA suspects that Landsbanki executives were involved in of market manipulation for nearly five years leading up to the crash. Prosecutor Hauksson has been charged with the task of shedding light on possible fraudulent and illegal activities among the Icelandic bankers, nick-named "the witches" at the time their businesses were booming across Northern Europe.

In May 2010, a similar probe was launched into the dealings of the one-time largest bank Kaupthing, and several top executives were briefly taken into custody.

For deeper insight into the Icelandic mess:

http://www.asymptotix.eu/content/ex-kaupthing-chiefs-arrested-iceland-probes-bank%E2%80%99s-collapse

http://www.asymptotix.eu/content/ash-cloud-icelandic-banking-clearing-black-report-special-investigation-commission