The Icelandic parliament passed the "Icesave" bill agreeing to repay more than $5.5bn (£3.4bn) to the British and Dutch governments yesterday.
The deal, which spreads the payments over the next 15 years, brings to a close months of controversy surrounding the cost of compensating UK and Dutch depositors who lost their savings when Iceland's Landsbanki was nationalised last October.
More than 320,000 savers had flocked to open accounts with the bank's Icesave subsidiary because of the high interest rates on offer. But when the parent company collapsed, the money was lost and account holders were reimbursed with money advanced by the British and Dutch governments.
A dispute has rumbled ever since about repayment of the loan. Earlier this week up to 3,000 people demonstrated again the plan, which equates to almost £11,500 per head of the population. But the Icesave bill was finally passed yesterday by the Althingi in Reykjavik. A total of 34 members voted in favour, 14 against and 14 abstained.
Landsbanki was the second of Iceland's three major banks to fail. Glitnir was the first to go, then Landsbanki, then Kaupthing, the biggest of the three. The UK Chancellor, Alistair Darling, was accused of hastening Kaupthing's end when he used anti-terrorism laws to try to rescue British savings by seizing Landsbanki UK's assets in the aftermath of its collapse.
Johanna Sigurdardottir, the Icelandic Prime Minister, said: "The state guarantee for the depositors of Landsbanki Icesave accounts is the single largest financial commitment the Icelandic state has undertaken. The Icesave dispute is one of the most difficult challenges Icelandic authorities have dealt with in recent history."
By settling the Icesave dispute, the Icelandic government has laid the foundations for a $4.6bn International Monetary Fund (IMF) loan that is contingent on its resolution. The country has already had one $2.1bn IMF loan, and another $2.5bn from its Scandinavian neighbours.