REYKJAVIK - Iceland has made a last-ditch compensation offer to Britain and the Netherlands in talks over $5 billion lost in Icesave accounts, ahead of a Saturday referendum which is expected to nullify the current deal.

Foreign Minister Ossur Skarphedinsson told the Financial Times Deutschland that Iceland was awaiting British and Dutch replies to the offer, which it hopes to present at home as a better alternative and so avoid the referendum.

Skarphedinsson told the paper the deadline of the referendum meant we're under high pressure like never before. Those are good conditions for achieving an agreement.

A source familiar with the matter declined comment on whether the Netherlands and Britain were due to respond to any Icelandic proposal. Britain's Treasury said it was not giving a running commentary on the long-running Icesave negotiations.

After talks ended for the day, Iceland's Foreign Ministry spokesman Elias Gudjonsson said: We are not giving any details about the meeting that just ended. It is still open whether these talks will continue.

Skarphedinsson said that if Saturday's referendum went ahead a No vote was certain and that the negotiations would be further drawn out.

Less than a fifth of Icelanders back the Icesave bill. Most see the terms as unfair and some want to vote down the deal to vent their anger and frustration at Iceland being bullied into a deal by two bigger countries.

Rejection of the Icesave bill would likely freeze the foreign aid needed to resuscitate Iceland's economy and cloud its prospects of joining the European Union.

Skarphedinsson said Britain and the Netherlands could try to hinder Iceland's ambitions to join the bloc, but he had no reason to believe they actually would.
Support for accession has been falling in past months and membership now opposed by more than half of Icelanders, nearly twice the level seen just after the 2008 financial crisis in which three of Iceland's leading banks collapsed.

Attitudes towards EU membership are changing drastically, said Gudbjorg Andrea Jonsdottir, research director at pollster Capacent. There is a lot of anger over the Icesave saga and, rightly or wrongly, some blame is directed at the EU, which only adds to long-held Icelandic suspicions about Brussels.

Traditionally go-it-alone Icelanders are concerned about losing control over their treasured fishing industry to the EU.

GREAT FRUSTRATIONS

Skarphedinsson was hopeful Icelanders would accept any cancellation of the referendum should a new deal more favourable to Iceland be struck. But the ballot may be difficult to cancel without support from opposition parties, who are trying to turn the referendum into a vote on the centre-left government.

If we reach a deal in the short-term, the conditions would be so good that there wouldn't be any great frustrations among the population, Skarphedinsson said.

Britain and the Netherlands have proposed softer terms than those agreed to late last year, but talks broke down last week as Iceland held out for a better deal.

Nevertheless, Iceland has little choice but to push for an agreement because Britain and the Netherlands want to settle the Icesave matter before funds from the International Monetary Fund can resume and help rebuild its shattered economy.

Prime Minister Johanna Sigurdardottir has tried to play down the expected rejection of the Icesave bill, which she pushed through parliament at a great political cost but which was rejected by the president, triggering the referendum on March 6.

(Additional reporting by David Stamp in Berlin and Nicholas Pollard in Stockholm; Editing by Jon Boyle)

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