Iceland's economy grew briskly in the latest quarter, its best performance since the country's financial system nearly collapsed in 2008 and a rare dose of positive news ahead of a referendum over foreign debts.

The referendum, over repayment terms for Reykjavik's $5 billion Icesave debts to Britain and the Netherlands, is widely expected to result in a no vote which risks further delaying vital financial aid.

Iceland's gross domestic product (GDP) increased by 3.3 percent in the last three months of 2009 from the prior three months.

That's a nice number, but it's not springtime yet, said Antje Praefcke, analyst at Commerzbank. Maybe there's less snowfall, but it's not spring yet.

Iceland's economy remains in dire straits and the figures will do little to sway angry voters who are expected to reject an unpopular deal on Icelandic debts struck last year.

While the quarterly increase was welcome news, GDP was still down 7.0 percent from a year earlier. Praefcke said Iceland's central bank still expected further economic contraction and the referendum risked delaying a recovery.

Despite the negative consequences of rejecting the deal, Icelanders have no real incentive to approve it. Furious about what they see as overly harsh terms from their creditors, they are now certain they can get a much better deal.

The debts arose after the two countries compensated their savers for money lost in accounts run by an Icelandic bank.

Britain and the Netherlands have already offered easier repayment terms, so there is no reason for voters on the island of 320,000 to agree to the existing deal, which was drawn up late last year.

The Icesave debt amounts to more than $15,000 for every Icelander, although most of the money is likely to be raised eventually by the sale of assets of Landsbanki, which operated the accounts before folding late in 2008.

(Editing by Jon Boyle)

Iceland United kingdom