The referendum, with a 60 per cent turnout, saw a full 93.3 per cent of Icelandic voters reject a deal to repay the Dutch and British governments a total of €3.9bn (£3.5bn) by 2024 at an interest rate of about 5.5 per cent.
The British and Dutch governments had compensated over 400,000 depositors for the losses suffered when Icesave failed. They now want the money back from Iceland.
However, the majority of Icelanders blame reckless bankers and politicians for the crisis. They believe they are being unfairly penalised for risks taken by the banking industry.
British Chancellor Alistair Darling said Britain is "prepared to be flexible" with Iceland over the debt. "The fundamental point for us is that we get our money back, but in terms of the terms and conditions, we are prepared to be flexible", he is reported to have said.
Iceland's Prime Minister Johanna Sigurdardottir refused to vote in the referendum, claiming that Britain and the Netherlands were "holding Iceland hostage" in the talks by blocking any further aid from the International Monetary Fund (IMF).
The IMF has agreed to loan Iceland $4.6bn (£3bn) but the agreement is linked to the country's repayment of the international debt.
Iceland desperately needs to find a way to recover from the deadlock, as the dispute also threatens to jeopardise its chances of joining the European Union.
