The outcome of the referendum had not been in doubt since Iceland had recently been offered better repayment terms than those contained in the deal on which residents were voting.
Partial referendum results from around a third of the cast votes showed 93 per cent opposed the deal and less than 2 per cent supported it. The rest cast invalid votes.
But the rejection will still have major repercussions, keeping financial aid on hold and threatening to undermine the centre-left government of prime minister Johanna Sigurdardottir.
“This has no impact on the life of the government,” Ms Sigurdardottir told public television.
“We need to keep going and finish the (Icesave) debate. We have to get an agreement.”
The referendum, Iceland’s first since independence from Denmark in 1944, was forced by the refusal of Iceland’s president to sign a law in January on repayment terms negotiated by the government and approved by parliament.
He cited public anger at the time. Since then, the anger of the people on the recession-hit island has only grown.
While polls show Icelandic people believe the debts should be repaid, residents bitterly resent being stuck with a bill for the mistakes of a handful of bankers under the watch of foreign governments.
The Icesave debts come to more than $15,000 for each one of the 320,000 people on the island.
The debts arose after Iceland’s top banks all collapsed within days of each other in 2008, brought down when credit dried up in the global financial crunch.
Around 400,000 savers in Britain and the Netherlands had deposits with one of the banks in so-called Icesave online deposit accounts.
The two countries compensated the savers and since then have demanded their money back.
What makes the impasse all the more problematic is that the International Monetary Fund is waiting for the affair to be resolved before resuming financial aid, money which is crucial if Reykjavik is to rebuild a shattered economy.
Turnout was high despite freezing rain and howling wind – not uncommon for March in a country near the Arctic Circle.
“We want to pay our debts, but we want to do it without going bankrupt,” said Steinunn Ragnarsdottir, a pianist who voted in Reykjavik City Hall with her two-year-old daughter.