Voters in Iceland rejected a government-backed deal to repay Britain and the Netherlands for their citizens’ €3.5bn worth of deposits in a failed online bank, referendum results showed – sending the dispute to an international court and plunging the economically fragile country into new uncertainty.

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.

Iceland’s new government said it will ask parliament to vote on whether the recession-hit country should start membership talks with the European Union.