Iceland PM says it's make-or-break time on Icesave

A page from icesave online bank is seen on a computer screen, in London October 7, 2008.

REYKJAVIK (Reuters) - Iceland's prime minister said on Tuesday the country had reached a decisive moment in its effort to reach a new deal on repaying "Icesave" debts to Britain and the Netherlands.

"Today and tomorrow are make or break," Prime Minister Johanna Sigurdardottir told reporters coming out of a cabinet meeting, when asked about the Icesave situation. "We need to be hopeful until all avenues have been exhausted," she added.

Iceland is due to hold a referendum on Saturday on whether to nullify an old agreement reached on repayment of close to $5 billion owed to Britain and the Netherlands after they compensated savers in their countries who lost money in Icelandic deposit accounts.

Voters are widely expected to vote against the old deal, which would result in extended delays to much-needed foreign aid. Britain and the Netherlands want Iceland settle the Icesave matter before funds from the International Monetary Fund can resume.

That in turn means Iceland's attempts to rebuild its economy, which was shattered by the 2008 financial crisis, could take much longer than hoped.

Icelandic negotiators have met on and off with British and Dutch representatives to come up with a new deal that would avoid the referendum and potentially unblock aid.

Finance minister Steingrimur Sigfusson said the referendum would go ahead "unless we are faced with a totally different situation."

Britain and the Netherlands have proposed softer terms than those agreed to late last year, a deal Icelanders are to vote on this Saturday, but talks broke down late last week.

(Editing by Jon Boyle)