The Icelandic parliament decided after an emergency session how to stage a national referendum on repaying almost €4bn to Britain and the Netherlands over the collapse of the Icesave bank – a poll that is seen as a defining moment in the bankrupted country’s economic recovery.

Iceland's leader said the country would "honour its obligations" over the £2.3bn (€2.55bn) owed to Britain for lost savings.

Iceland decided today to repay Britain and the Netherlands the billions it borrowed to compensate savers in those countries who lost funds in the collapse of an Icelandic internet bank last year.

Europe’s longest-serving prime minister won a narrow electoral victory today while his strongest challenger, the former Reykjavik mayor seeking to become the nation’s first female leader, failed to win a seat in Parliament.