"The government has decided to provide up to 300 million kronur to assist the tourism industry in Iceland after the volcanic eruption in Eyjafjallajokull," finance ministry spokesman Huginn Thorsteinsson told AFP.

"Now the people in the tourism industry are deciding in what way the money should be channeled and if the tourism industry itself needs to put up money to help the recovery process after the eruption," he added.

Still struggling to overcome the deep crisis that set in when its major banks collapsed in late 2008, Iceland had until recently put virtually all its hope for future prosperity in its booming tourism sector, as a growing number of visitors flocked to see its myth-like volcanic landscapes and geysers.

A first eruption at the Eyjafjoell volcano last month, with its magnificent and largely harmless lava falls, even helped pad the tourism industry's coffers further, turning a previously deserted part of the North Atlantic island into a major attraction.

But when another part of the volcano began erupting on April 14, just hours after the first eruption ended, it covered much of southern Iceland, and large swaths of Europe in a massive cloud of flight-halting ash.

The ash cloud could cause Europe's tourism sector losses of up to one billion euros, according to a preliminary estimate by the European Commission this week.

Observers in Iceland expect a fifth of all pre-booked trips to the island to be cancelled.

"If we do not see any changes in the volcanic activity, we might see up to 20 percent cancellations in pre-booked trips to Iceland. That could very seriously affect Iceland's tourism industry," Gunnar Borgthorsson, the marketing director at the Icelandic Tourism Board, told AFP.

The volcano, he warned, will be far more damaging to Icelandic tourism than the economic crisis, which actually served to boost the industry, since lower prices have attracted foreigners as financially-strapped Icelanders have increasingly been forced to holiday at home.

"Travellers are well aware now that despite the financial crisis, Iceland is still functional," Borghorsson said.

"But this crisis is of another kind and has not only effects on Iceland. This volcanic eruption has had very serious effects on the tourism in Europe and people have lost their faith in air transport. That is something we must correct," he insisted.

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