Early referendum results showed that 98 percent of Iceland's 230,000 voters had voted "No" against the deal to repay the UK and Dutch governments who compensated Icesave 340,000 customers in 2008 - the outcome came as no surprise to the Reykjavik government.
"Initial figures indicate clearly that the December amendment to the Icesave legislation of August 2009 will be repealed," the government said in a statement just minutes after polling stations closed at 2200 UTC.
The online bank Icesave, run by the Icelandic bank Landsbanki, collapsed at the height of the global financial crisis in 2008.
The so-called "Icesave Bill" was passed by a wafer-thin majority in 2009. Iceland's President Olafur Grimsson then used his power of veto to block the legislation and called a national referendum.
Iceland's "No" vote could hold up payment of the remaining half of a 2.1-billion dollar International Monetary Fund (IMF) rescue package. It could also have a negative impact on the Reykjavik government's bid to join the European Union and destabilize Prime Minister Johanna Sigurdardottir's leftwing government. It could also affect the country's credit rating.
"This is nothing that comes as a surprise," Sigurdardottir told public broadcaster RUV. "The result is not a shock for the government, considering the state of affairs," she added.
Ms. Sigurdaddottir has ruled out standing down as Iceland's premier and said her government would continue negotiations with Britain and the Netherlands. Last-ditch talks on Friday with representatives from the three countries failed to resolve the issue.
Editor: Tony Dunham