The repayment would be to compensate them for money they paid to 340,000 of their citizens hit by the October 2008 collapse of Icesave online bank.

According to the latest opinion poll, three-quarters of voters will vote to spurn the agreement, which was passed by parliament in late December.

It went to a referendum after Olafur Ragnar Grimsson, the Icelandic president, refused to sign it into law because of the public opposition.

Johanna Sigurdardottir, the prime minister, went so far as to describe on Friday the referendum "meaningless," saying she saw no reason to go to the ballot box.

Rescue risk

A demonstration against the deal being voted on was scheduled in front of parliament for 1400 GMT.

Observers caution that an Icelandic refusal to repay their Icesave debt could block an International Monetary Fund rescue package, as well as European Union and euro currency membership talks.

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

Reykjavik had been negotiating with London and The Hague for weeks to avert the referendum, but the talks were adjourned on Friday without a new agreement on the table.

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