Chancellor ready to be 'flexible' after Iceland rejects £2.3bn repayment deal

With all but 2,500 of the 143,784 ballots counted, 93 per cent had voted "No" with just 1.8 per cent in favour of reimbursement to the UK and Dutch governments following the collapse of savings bank Icesave.

The Treasury was understood to be "disappointed" but "not surprised" at the result.

Mr Darling insisted that getting the money back was the "fundamental point", but added that it could take some time.

The UK government was forced to compensate tens of thousands of savers after the Icelandic bank's collapse in 2008, and yesterday Mr Darling said it was likely to be "many, many years" before Britain was repaid by Iceland.

He said: "You couldn't just go to a small country like Iceland with a population the size of Wolverhampton and say, 'Look, repay all that money immediately'. So we've tried to be reasonable; the fundamental point for us is that we get our money back – but on the terms and conditions and so on, we're prepared to be flexible."

The British and Dutch governments want reimbursement for the 3.8bn (3.4bn) total they paid in compensation to customers.

Talks between Iceland, Britain and the Netherlands to come up with a better deal to try to avert the referendum broke down at the end of last week. Many voters in Iceland have objected to the tough terms of the deal imposed by the debtor countries, not the idea of payment itself.

It would seemingly require each person to pay the equivalent of about 89 per month for eight years – the equivalent of a quarter of an average family's income.

Magnus Arni Skulason, a leading voice in the "No" campaign, said: "This is a strong no from the Icelandic nation."

He added: "The Icelandic public understands that we are sovereign and we have to be treated like a sovereign nation – not bullied like the British and the Dutch have been doing."

Prime minister Johanna Sigurdardottir said the result of the referendum was "no surprise".

She added: "Now we need to get on with the task in front of us, namely to finish the negotiations with the Dutch and the British."

It is understood the British offered the Icelandic authorities a "best offer" for repayment, including an interest rate equal to that for a loan from the Nordic countries that the Icelandic government accepted in July 2009.

Also offered was relief on the first two years of interest for the loan, amounting to some 450 million (about 400m).

But Icelanders see the deal as an unfair result of their own government's failure to curtail the excessive spending of a handful of bank executives.

The global financial crisis wreaked political and economic havoc on Iceland, as its banks collapsed within the space of a week in October 2008 during the credit crunch and its currency, the krona, plummeted.

The Icelandic government was the first to fall as a result of the meltdown.

Unemployment has surged since, to about 9 per cent in January, and inflation is running at about 7 per cent annually, while the island's economy continues to shrink.

The referendum result could jeopardise Iceland's credit ratings, making it harder to access much-needed funding to fuel an economic recovery.