A deal for Iceland to repay up to £2.3 billion lost by savers in Britain when the country's banking system collapsed was thrown into doubt today when its president refused to sign it off.
Just days after a Bill was finally agreed by Iceland's parliament, Olafur Ragnar Grimsson announced his decision, which means that it must be put to a referendum.
Around a quarter of Icelandic voters had signed a petition urging him to veto the legislation and allow a public vote amid fears the country could not afford repayments.
The Treasury would recoup up to £2.3 billion from Iceland under the measure, after it stepped in to compensate British depositors with the Icesave scheme.
A spokesman said: "The Treasury will consult with colleagues in Iceland to understand why this Bill has not been passed.
"And we will work with them, the Netherlands and within the EU to resolve this issue as soon as possible."
It is only the second time since Iceland's republic was founded in 1944 that the president has not signed into law a Bill approved by Parliament.
Mr Grimsson said: "It is the cornerstone of the constitutional structure of the Republic of Iceland that the people are the supreme judge of the validity of the law.
"It is... the responsibility of the president of the republic to ensure that the nation can exercise this right."
He added that the referendum would take place as soon as possible.
Today's development could dent Iceland's chances of being given a fast-track entry to the European Union.
But it does not affect UK consumers who had savings with Icesave, the majority of whom have already received their money back in full.
Around 298,000 British savers collectively had £4.56 billion deposited with Icesave.
Their accounts in the bank were frozen in October 2008 following the collapse of its parent company, Landsbanki.
The UK Government pledged that no-one would lose money through the failure of the group, and said it would step in to cover any money lost above the sums covered by deposit guarantee schemes.
Iceland agreed to pay back the first 20,887 euros (£18,600 at today's exchange rate) that people lost, with the UK's Financial Services Compensation Scheme topping this up to £50,000 and the Government covering sums above this amount.
In August, the Icelandic parliament agreed to pay up to £2.35 billion to the UK and £1.14 billion to the Netherlands, effectively turning the bail-out into a loan, which was to be repaid over 15 years from 2016; however, this has now been thrown into doubt.
The FSCS had returned £3.9 billion of savers' money by the end of March this year.
The £660 million which had yet to be repaid in March was held in fixed-term accounts. These savers will receive their compensation around the time their accounts would have matured.