The Central Bank of Iceland has cut its key interest rate to 4.5% from 5.5% to help revive the country's struggling economy.
The cut is the eighth this year, and was bigger than analysts had expected.
Iceland's banks failed in 2008 sparking a spectacular economic collapse, but the economy is now growing again.
Last year, the economy shrank by 6.8%. However, figures released on Tuesday showed the economy expanded by 1.2% in the third quarter.
This was the first growth that Iceland's economy has recorded for two years.
Last month, the country's Statistics Office said the economy was expected to contract by 3% this year, with a small expansion of 1.9% forecast for next year.
Mats Olausson, chief strategist for emerging markets at the banking group SEB, said the central bank had a difficult balancing act to perform.
"Large parts of the domestic economy would still need much lower interest rates while at the same time... it is important for Iceland to have an attractive interest rate for locals and foreigners."
At their peak at the end of 2008, rates were 18%.
The governor of the central bank of Iceland recently told the BBC that joining the euro could still be a "good option", despite the debt crisis.
It opened membership talks with the European Union earlier this year.