By Agencies

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Icelanders have headed to the polls in a referendum on repaying the equivalent of $5.3bn to the UK and the Netherlands in the wake of the collapse of Iceland's online Icesave bank.

The majority of voters on Saturday are expected to roundly reject the unpopular repayment legislation.

Ingimar Gudmundsson a 57-year-old lorry driver, said: "I will vote 'no' simply because I disagree very strongly with us ... having to shoulder this burden."

The money would be used to compensate the British and Dutch governments, which paid it out to 340,000 of their citizens who were hit when Icesave collapsed in 2008.

Observers say an Icelandic refusal to repay the money could block the remaining half of a $2.1bn International Monetary Fund (IMF) rescue package, as well as its EU and euro currency membership talks.

It could also damage Iceland's credit rating and destabilise the government, which negotiated the agreement in the first place.

The legislation was passed by parliament last year, but it went to a referendum after Olafur Ragnar Grimsson, the Icelandic president, refused to sign it into law because of huge public opposition.

'Unacceptable' conditions

Magnus Arni Skulason, a founder of the Indefence movement, which is opposed to the repayment deal, said the agreement being voted on was "obtained through coercion, with threats from both the British and the Dutch".

He also noted that most Icelanders felt the demanded 5.5-per cent interest rate was particularly unacceptable.

"You're basically sending the bill to tax payers for the failure of a private bank," he was quoted by the AFP news agency as saying.

Johanna Sigurdardottir, the prime minister, described the referendum as "meaningless," saying she saw no reason to go to the ballot box.

Jan Randolph, the head of sovereign risk at HIS Global Insight, told Al Jazeera there was no indication Iceland would not repay the debt, but that the referendum was about winning better terms.

"I think the referendum is really about bargaining position. The government will use the 'no' vote to come back to the British and the Dutch and say: 'Look, the people are not behind this, you've got to improve the terms further'."

Bank collapse

In the weeks leading up to the referendum, Reykjavik had been negotiating better terms with London and The Hague, but the talks were adjourned on Friday without a new agreement on the table.

Iceland's leaders said they would resume talks after the referendum.

Randolph said: "The referendum is a chance for the Icelanders to vent their anger - their anger at their government and at Britain for using anti-terror laws to seize Icelandic bank assets, which accelerated the implosion of the banking system."

In the aftermath of the Icesave collapse, the UK invoked so-called anti-terror laws to take control of Landisbanki assets held in Britain. Icesave was the the online arm of Landisbanki.

First results from the referendum are expected shortly after polling stations close at 22:00 GMT, with final results later the same night.

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