The central bank's governor, David Oddsson, told reporters at a Reykjavik news conference that the rise was part of a deal with the International Monetary Fund, under which the beleaguered nation will receive a $2 billion standby facility, Reuters reported.
The action marks a massive turn in policy. The central bank had cuts its interest rate by three full percentage points to 12% earlier this month.
Iceland's currency collapsed after the government was forced to take control of the country's largest banks after the institutions were unable to obtain short-term funding. The nation's economy is expected to contract sharply as it deals with the aftermath of the crisis.
The conditions of the IMF package "presumably included decisive action to support the currency, reduce the economy's previously excessive reliance on overseas finance and control inflation, which is currently at 14%," wrote Ben May, European economist at Capital Economics.
"Today's move clearly goes a step in that direction, but may not enough on its own," May said. "Accordingly we certainly would not rule out further sharp hikes in Icelandic interest rates over the coming weeks and months. Needless to say, all of this bodes ill for the outlook for the economy."
Meanwhile, the European Commission is reportedly preparing a financial package to help support Hungary, according to news reports. A spokeswoman said the package is being discussed with European Union member states, Dow Jones Newswires reported.
The IMF agreed Sunday to provide Hungary with "substantial" financing as Budapest and other Central and Eastern European governments wrestle with outflows of capital amid global risk aversion and worries about vulnerable emerging economies' external financing needs.
The Hungarian forint was 3.4% higher against the single currency, trading at 263.49 per euro in recent action, according to FactSet.
Hungary's Bux stock index was 8% higher Tuesday amid broad European equity gains.
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