Angry Icelanders went out to vote today determined to give the government a bloody nose over plans to use €4bn of taxpayers' money to pay Britain and The Netherlands for lost deposits when a major bank collapsed.
Amid allegations of bullying and profiteering by bigger nations, voters were expected to deliver a massive people-power rebuff in the referendum to pay off the tiny island nation's international debts.
Polls suggest three quarters of Icelanders are expected to vote "No" in the referendum.
The vote will formalise a public backlash that has become Iceland's latest stumbling block on the difficult road out of a deep recession, jeopardising its credit rating, access to much-needed bailout money from the International Monetary Fund and desired entry to the European Union.
It has been desperately seeking a revised deal with its European creditors since President Olafur Grimsson tapped into public anger and used a rarely-invoked power to refuse to sign the so-called Icesave Bill into law in January, triggering the national poll.
At the heart of the dispute is the payment of £2.3bn (€2.55bn) to Britain and €1.33bn to the Netherlands as compensation for funds those governments paid out to around 340,000 investors with savings in the Icesave internet bank.
Britain and The Netherlands offered better terms last week - including a floating interest rate on the debt plus 2.75%, representing a significant cut on the 5.5% under the original deal hammered out at the end of last year.
But Britain said its "best and final offer had been turned down".
Iceland is continuing to hold out for more, aware that any new deal must win substantial political and public support to avoid another veto by the president.
"It is improbable that a new deal on Icesave will be reached before tomorrow," finance minister Steingrimur Sigfusson said in Reykjavik after a Cabinet meeting yesterday.
Icelanders largely view the deal both as bullying by bigger nations and an unfair result of their own government's failure to curtail the excessive spending of a handful of bank executives that led the country into its current malaise.
Because of Iceland's tiny population, around 320,000, the original deal would have required each person to pay around €100 a month for eight years - the equivalent of a quarter of an average four-member family's salary.
That was a step too far for many ordinary Icelanders who resent forking out the money to compensate for losses incurred by potentially wealthier foreign investors who chased the high interest rates offered by Icesave.
There is also residual anger that Britain invoked anti-terrorist legislation to freeze the assets of Icelandic banks at the height of the crisis, prompting the worst diplomatic spat between the two countries since Cod Wars of the 1970s over fishing rights in the North Atlantic.
"I am going to say no because it's not fair and justifiable that the Icelandic nation should pay for other people's mistakes," said Benedikt Mewes, 33, a cashier at the National Post Office in Reykjavik.
Mr Sigfusson - who, along with prime minister Johanna Sigurdardottir does not plan to vote today - said he had spoken to his counterparts in Britain and The Netherlands requesting that discussions continue after the weekend, but had not yet received a reply.
Officials within Iceland's Social Democrat-Left Green coalition government, whose authority is being challenged by the weekend poll, acknowledge the repercussions of a failure to settle the dispute.
Although the International Monetary Fund has never explicitly linked delivery of a €3.33bn loan to the reaching of an Icesave deal, it is connected to Iceland repaying its international debt - the months taken to reach the original Icesave deal were responsible for holding up the first tranche of IMF funds last year.
There are also fears that Britain and the Netherlands will take a hardline stance on Iceland's application to join the EU and refuse to approve the start of accession talks until an Icesave deal is signed into law.
Those are factors that Iceland can do without as it struggles to recover from a rout in which most of its banking system collapsed.
The Icelandic government has forecast the economy will contract 2% to 3% this year, after shrinking 7% last year.
"Several months' delay could deepen the 2010 contraction to about 5%," economy minister Gylfi Magnusson said this week.