REYKJAVIK – Icelanders have massively rejected a deal to pay Britain and the Netherlands billions for losses in the collapse of the Icesave bank, the government said Saturday after partial referendum results.

"Initial figures indicate clearly that the December amendment to the Icesave legislation of August 2009 will be repealed," the government said in a statement just minutes after polling stations closed at 2200 GMT.

Some 93.1% of voters cast ballots opposing the deal, partial results showed after 32% of ballots were counted, said RUV public broadcaster which compiles all electoral statistics.

Only 1.6% of voters had so far voted "yes" to the Icesave deal.

It remained unclear how many of Iceland's 230,000 eligible voters had cast their ballots Saturday, but an hour before polls closed the turnout rate stood at 54.45%, according to RUV.

Icelanders were asked to vote on whether the country should honour an agreement to repay Britain and the Netherlands 3.9 billion euros ($5.3 billion) by 2024.

This would be to compensate them for money they paid to 340,000 of their citizens hit by the collapse of Icesave in 2008.

Before Saturday's plebiscite, observers cautioned that a "no" to the Icesave bill could cause difficulty.

They argued that an Icelandic refusal to repay the money could block the remaining half of a $2.1-billion International Monetary Fund rescue package, as well as its European Union and euro currency membership talks.

It could also push Iceland's credit rating over the cliff and destabilise the leftwing government, which negotiated the agreement in the first place.

Nonetheless, the massive rejection of the bill, which was voted through parliament in December but sent to a referendum after President Olafur Ragnar Grimsson refused to sign it, came as no surprise. Interview: Grimsson says Icesave vote a boost for democracy

Observers and opinion polls had suggested as many as three quarters of voters would spurn the agreement, and the leftwing government has for weeks been attempting to hammer out a new and improved deal.

"Work continues on a mutually acceptable solution to Icesave," the government said late Saturday.