The no-confidence vote came on the heels of a referendum last Satruday [Reuters]

Iceland's centre-left government has survived a vote of no-confidence after suffering a defeat in a referendum over an unresolved debt dispute with Britain and the Netherlands.

The main opposition party, the Independence Party, called the vote after Icelanders rejected on Saturday a deal providing a state guarantee for repaying more than $5bn to the British and Dutch.

The parliamentary vote on Wednesday was close, with 32 members voting against the bill and 30 voting in favour while one abstained.

Prime Minister Johanna Sigurdardottir's government had negotiated the deal with Britain and the Netherlands, which compensated savers in their countries who lost money as banking group Landsbanki collapsed in 2008.

The dispute is now likely to be settled in a European court, an outcome which some analysts have said could prove to be more costly for Iceland than the agreement dismissed by voters.

Economists have said failure to resolve the issue could deter investment, weaken Iceland's already battered credit ratings and delay progress in loosening currency controls.

Source: Agencies