Chief Secretary to the Treasury Danny Alexander said he was disappointed that Icelanders had again rejected an "Icesave" debt deal, adding that the issue would now probably go to the courts.
In a referendum on Saturday, Icelanders rejected for a second time a plan to repay €4bn (£3.5bn; $5.8bn) to Britain and the Netherlands in debts from a bank crash.
"It is obviously disappointing that it seems that the people of Iceland have rejected what was a negotiated settlement," Alexander told BBC television.
"Of course we respect the will of the Icelandic people in this matter and we are going to have to now go and talk to the international partners with whom we work, not least the government of the Netherlands. It now looks like this process will end up in the courts," he said.Reuse content