UPDATE 1-Icesave talks collapse ahead of referendum
* Talks fail ahead of vote on Icesave repayment bill
* Iceland owes Britain, Netherlands more than $5 bln
* Sides have argued over interest rate in proposal
(Adds details, second dateline)
AMSTERDAM/STOCKHOLM, March 5 (Reuters) - Iceland walked away from talks on Friday with the Netherlands and Britain over debts related to the 2008 collapse of its banking system, a source familiar with the matter told Reuters.
Iceland's parliament passed a law late last year to repay the Dutch and the British more than $5 billion related to the banking collapse, but the bill was forced into a public referendum after Iceland's president refused to sign it.
Icelanders will vote Saturday on that referendum, which is expected to fail by a wide margin.
A statement from Iceland's finance ministry said its negotiating committee was returning to Reykjavik from London and that it hoped for fresh talks as soon as next week.
But a source familiar with the situation told Reuters, on condition of anonymity, that Iceland "walked away" from the talks and that no new talks were planned or scheduled.
Iceland, however, denied talks have broken down.
"The official attitude here is that talks are ongoing and it's just a break," a spokesman for Iceland's Prime Minister Johanna Sigurdardottir said.
The spokesman added that Finance Minister Steingrimur Sigfusson believes talks can continue after the weekend but there was no confirmation of that.
On Feb. 19 Britain and the Netherlands proposed a new deal to Iceland that would replace the agreement underlying the referendum. That new deal lowered the interest rate Iceland would pay and gave it a two-year interest holiday.
Iceland countered, however, that the interest rate proposed was still too high and would inappropriately let its creditor nations make a profit on the deal.
Britain and the Netherlands compensated savers in online banks run by Icelandic banks, particularly Icesave, when the island nation's system collapsed during the credit crisis. (Reporting by Ben Berkowitz in Amsterdam and Nick Vinocur in Stockholm; editing by Philippa Fletcher)