REYKJAVIK (Reuters) -- Icelandic voters have overwhelmingly rejected a $5 billion deal to repay debts to Britain and the Netherlands.
The outcome of the March 6 referendum had not been in doubt since Iceland had recently been offered better repayment terms than those contained in the deal on which residents were voting.
Still, the scale of the "No" vote testified to the anger Icelanders feel a year-and-a-half after their island's economic collapse became a symbol of the global financial crisis.
Results from about half of the votes cast showed more than 93 percent opposed the deal and less than 2 percent supported it. The rest of the ballots were blank or invalid.
Iceland now must go back to the negotiating table with the British and Dutch in the hope of striking a new accord swiftly. The longer it takes, the greater Iceland's financial pain.
Foreign Minister Ossur Skarphethinsson told reporters Britain and the Netherlands had indicated they were willing to hold new talks.
Financial aid has been put on hold during the impasse, which is also threatening to undermine the centre-left government of Prime Minister Johanna Sigurdardottir.
"This has no impact on the life of the government. We need to keep going and finish the debate. We have to get an agreement," Sigurdardottir told public television.
Iceland desperately needs to solve the so-called "Icesave" impasse so it can get international aid flowing to its economy, which contracted around 7.7 percent last year and is expected to shrink again in 2010.
The International Monetary Fund and Nordic countries have promised to loan Iceland around $4.5 billion to help it kick-start the economy. But after initial payments, much of the cash is frozen pending resolution of the Icesave debt.
Finance Minister Steingrimur Sigfusson said voters had sent a very clear message about their disappointment and anger.
The referendum, Iceland's first since independence from Denmark in 1944, was forced by the refusal of the country's president to sign a law in January on repayment terms negotiated by the government and approved by parliament.
While polls show Iceland's people believe the debts should be repaid, they bitterly resent being stuck with a bill for the mistakes of a small number of bankers under the watch of foreign governments. The Icesave debts come to more than $15,000 for each one of the 320,000 people on the island.
The debts arose after Iceland's top banks all failed within days of each other in 2008, weighed down by debt and unable to secure credit during the global financial crunch.
About 400,000 savers in Britain and the Netherlands had deposits with one of the banks in Icesave online deposit accounts. The two countries compensated the savers and since then have demanded their money back.
Turnout was high despite freezing rain and howling winds -- not uncommon for March in a country near the Arctic Circle.
A group of several hundred protesters gathered, saying that Iceland should focus on helping its own citizens get through the crisis before repaying foreign obligations.
"No Icesave. No traitors in power. The nation is innocent," read one banner. "Save our homes instead," read another in a loud protest reminiscent of the "pots and pans revolution" which helped bring down the previous government a year ago.
"We want to pay our debts, but we want to do it without going bankrupt," said Steinunn Ragnarsdottir, a pianist who voted in Reykjavik's City Hall with her two-year-old daughter.
Iceland, Britain and the Netherlands started talks on a new deal once it became clear which way Icelanders would vote.
But a deal has proved elusive. Britain and the Netherlands softened terms, offering a variable interest rate instead of the relatively high fixed rate contained in the old Icesave deal. But Reykjavik held out.
Dutch Finance Minister Jan Kees de Jager said he was disappointed there was no agreement yet but that he remained committed to finding a solution.
The Dutch appeared to harden their position by linking the Icesave dispute to Iceland's hopes of joining the European Union. Brussels invited Iceland to accession talks last month.
"I see that accession negotiations are an additional tool to enforce the agreement with Iceland," Dutch Foreign Minister Maxime Verhagen was quoted as saying by the ANP news agency.
The Icesave issue has rekindled anti-EU sentiment in Iceland. Support for membership has been falling and is now opposed by more than half of Icelanders.