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President Olafur Grimsson vetoed legislation that would have allowed the repayment of billions of dollars, The Guardian reported. But Prime Minister Johanna Sigurdadottir said the country is not reneging on its agreements with Britain and the Netherlands.

Paul Myners, the British financial services minister, warned the consequences could be dire if Icelanders reject repayment.

"The Icelandic people, if they were to reach that conclusion, would effectively be saying that Iceland does not want to be part of the international financial system, that Iceland doesn't want to have access to multinational, national and bilateral funding and doesn't want to be regarded as a safe counter-party with whom to do business", Myners said.

Fitch Ratings cut the rating on Icelandic foreign debt to below investment grade, MarketWatch reported.

"Today's decision by Iceland's President to refer the 'Icesave' agreement to a referendum creates a renewed wave of domestic political, economic and financial uncertainty. It also represents a significant setback to Iceland's efforts to restore normal financial relations with the rest of the world", Paul Rawkins, a senior director for Fitch in London, said.

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