LONDON: Britain has warned Iceland it risks international financial isolation if it votes against a bill to compensate Britain and the Netherlands over the failure of Icesave bank.

Financial services minister Paul Myners also said controversy over the 3.8 billion euro (5.4 billion dollar) compensation deal could impact on Britain's support for Iceland's bid to join the European Union.

Iceland's President Olafur Ragnar Grimsson said Tuesday he would not sign a controversial bill to compensate the British and Dutch governments for reimbursing Icesave investors, triggering anger in London and The Hague.

Grimsson said he would put the bill to a referendum instead.

"The Icelandic people, if they were to reach that conclusion, would effectively be saying that Iceland doesn't 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 country with whom to do business," Myners told the BBC on Tuesday.

He also said: "This development (would) need to be factored into a decision as to whether we would be supportive of Iceland's application to join the EU."

"But that's early days yet," he added.

The warning came after Britain's Treasury said it expected Iceland to meet its "obligations," while The Netherlands said it was "unacceptable".

"The UK government expects Iceland to live up to its obligations," a Treasury spokesperson said.

"The Treasury will consult with colleagues in Iceland to understand why this bill has not been passed and will work with them, the Netherlands and within the EU to resolve this issue as soon as possible," the spokesperson added.

The Icesave bill, narrowly approved by the Icelandic parliament on December 31, calls for the payout to the British and Dutch governments for having compensated more than 320,000 British and Dutch savers who lost money in the collapse of the Icelandic bank.

Icesave -- an online subsidiary of the Landsbanki bank which had to be rescued in October 2008 -- attracted foreign savers because of its high interest rates.

But they lost their savings when accounts were frozen during the devastating credit crunch. The British and Dutch savers were partially compensated by their own governments, which then turned to Reykjavik looking for the money paid out.