Negotiations with Iceland over the repayment of £2.3 billion in debts to the UK have broken down after representatives of the island nation walked out of talks in London.
The walk-out means that Iceland will next week hold a referendum expected to reject a deal for repayment of cash owed to Britain and the Netherlands as a result of the collapse of Landsbanki, the bank behind the Icesave internet savings account.
The UK and Dutch governments this evening said they were "disappointed" that no deal had been reached after 18 months of talks.
Sources close to the talks said that Iceland had been offered an advantageous new floating interest rate on the debt, based on Libor (London inter-bank rate) plus 2.75%, which would have represented a significant cut on the 5.5% currently being charged. Also on the table was the offer of a two-year interest holiday worth around £400 million.
A Treasury spokesman said: "The UK and Dutch Governments are disappointed that despite their best efforts over the past year and a half that the Icelandic Government is still unable to accept our best offer on the Icesave loan.
"We have consistently supported Iceland's economic recovery and our latest proposal built upon this, offering the Icelandic Government the same interest rate as their current loan from the Nordic countries and, in addition, an offer to waive interest for the first two years amounting to 450 million euros.
"This money is still outstanding to UK and Dutch taxpayers and we remain committed to reaching a final agreement with Iceland in due course."
Iceland's finance minister Steingrimur Sigfusson said his negotiating team was returning to Reykjavik after encountering "significant differences" in the talks.
Mr Sigfusson said in a statement: "We had hoped to be able to reach a consensual resolution of this issue on improved terms, but this has not yet been possible."
The UK and Netherlands authorities stepped in with guarantees for deposits of 229,000 Britons and 114,000 Dutch nationals with savings in Icesave accounts. The UK is seeking £2.3 billion and the Netherlands 1.33 billion euros (£1.16bn) back from Reykjavik.