Iceland yesterday became the first European nation to strike a free trade deal with China, offering hope for its recession-battered economy.

The China-Iceland free trade pact will lower tariffs on a range of goods and is expected to boost seafood and other exports from the Nordic state to the world's second-largest economy. It comes at the start of a six-day visit to China by Icelandic Prime Minister Johanna Sigurdardottir that highlights her country's attempts to diversify an economy that was badly mauled by the bursting of a massive financial bubble in 2008.

Premier Li Keqiang told Sigurdardottir the agreement was "a major event in China-Iceland relations."

"It also signals the deepening of our relationship, especially our economic relationship which has been lifted to a new height," the Chinese premier said.

Trade between China and the country of just over 315,000 people rose 21.1 percent last year to US$180 million, according to China's Ministry of Foreign Trade. Iceland exports mostly fish to China and imports Chinese products from ships to shoes.

Sigurdardottir has been keen to push Icelandic services and the island's geothermal energy potential.

China is seeking permanent observer status in the Arctic Council, an eight-member body that includes Iceland and decides on policy in the region. China is expected to be accepted when a final decision is announced next month, drawing support from the prospect of heavy Chinese investment in the region's mining industries as evidenced by its proposal to sink US$2.3 billion into Greenland to secure 15 million tons of iron ore per year.

Shipping via the Arctic, meanwhile, would cut about 6,400 kilometers and two weeks off the journey between northern Europe and Shanghai.

China sees a range of opportunities in the Arctic and will continue to expand its research in the area and conduct further expeditions, said Leiv Lunde, director of the Oslo-based Fridtjof Nansen Institute.

"It's attractive also for all the resources but China is already a major shipping nation ... and Chinese companies are now very eagerly awaiting policy signals from the Chinese government on what kind of priorities they will give to the Arctic," said Lunde, who was attending a conference on Arctic issues in Shanghai.

Chinese investor Huang Nubo has been stymied in his bid to build an adventure tourism resort in northeastern Iceland that would include an airport, golf course, and 120-room hotel.

Iceland rejected his original bid to purchase the land, prompting Huang to blame Western prejudice and unfounded suspicions he was "a tool" of the Chinese military. Icelandic officials have said they don't see the resort as viable and Huang has said he will drop the project unless he gets approval by the end of May.

Xu Hong, an executive of Huang's Zhongkun Investment Group, said the company remained in contact with the landowner and Icelandic government.