The Government has insisted it was committed to getting £2.3 billion of savings back from Iceland despite people there appearing to resoundingly reject a plan to repay the money.
With much of the ballot counted, the vast majority had voted “no” in a referendum over whether to pay billions of pounds back to the UK and Holland following the collapse of savings bank Icesave.
The Government, which was forced to compensate tens of thousands of UK savers after the collapse in 2008, was understood to be “disappointed” but “not surprised” at the apparent result.
A number of Midlands councils also lost millions when the Icelandic economy collapsed two years ago.
A Treasury spokesman said: “The UK remains committed to reaching a final agreement with Iceland in due course. The result of the referendum is a matter for Iceland.”
The British and Dutch governments want reimbursement for the 3.8bn euros (£3.4bn) they paid out in compensation to customers in 2008.
Talks between Iceland, Britain and the Netherlands to come up with a better deal to try to avert the referendum broke down at the end of last week.
Many voters in Iceland have objected to the tough terms of the deal imposed by the debtor countries, not the idea of payment itself.
It would seemingly require each person to pay around $135 (£89) a month for eight years - the equivalent of a quarter of an average four-member family’s salary.
“This result is no surprise,” said Prime Minister Johanna Sigurdardottir. “Now we need to get on with the task in front of us, namely to finish the negotiations with the Dutch and the British.”
It is understood the British offered the Icelandic authorities a “best offer” for repayment, including an interest rate equal to that for a loan from the Nordic countries that the Icelandic Government accepted in July 2009.
Also offered was relief on the first two years of interest for the loan, amounting to some 450 million euros (£400m).
Locals see the deal as an unfair result of their own government’s failure to curtail the excessive spending of a handful of bank executives that led the country into its current malaise.
During voting, hundreds of protesters outside parliament in the capital Reykjavik banged pots and waved banners reading: “Icesave No! No! No!”.
“I said no,” said Palmar Olason, 71, at a polling station. “We should get a better deal,” he said.
The global financial crisis wreaked political and economic havoc on Iceland, as its banks collapsed within the space of a week in October 2008 during the credit crunch and its currency, the krona, plummeted.
The Icelandic government was the first to fall as a result of the meltdown.
Unemployment has surged since, to about 9 per cent in January, and inflation is running at about 7 per cent annually, while the island’s economy continues to shrink.
The referendum result could jeopardise Iceland’s credit ratings, making it harder to access much-needed funding to fuel an economic recovery.