Icelanders rejected for a second time a plan to repay $5 billion to Britain and the Netherlands from a bank crash, results showed on Sunday, and Iceland's prime minister warned of economic and political chaos.

Policymakers have said a 'no' in the Saturday referendum meant the dispute will end up in a European court. Economists have said the uncertainty is hurting efforts to drag Iceland out of recession, end currency controls and boost investment.

The worst option was chosen. The vote has split the nation in two, Prime Minister Johanna Sigurdardottir told state television, saying it was fairly clear the 'no' side had won.

State television said almost 60 percent of voters had rejected the agreement, based on results from five out of six voting districts, including the capital Reykjavik.

Many voters were against taxpayers footing the bill for irresponsible bankers. Just over 169,000 votes had been counted out of the 230,000 eligible voters.

Iceland's prime minister, who has predicted a 'no' vote would cause economic uncertainty for at least a year or two, did not say whether the government planned to resign.

We must do all we can to prevent political and economic chaos as a result of this outcome, she said.

The debt was incurred when Britain and the Netherlands compensated their nationals who lost savings in online Icesave accounts owned by Landsbanki, one of three Icelandic banks that collapsed in late 2008.

Britain and the Netherlands both said they were disappointed by the vote.

It is obviously disappointing that it seems that the people of Iceland have rejected what was a negotiated settlement, Britain's Chief Secretary to the Treasury Danny Alexander told BBC television.

Of course we respect the will of the Icelandic people in this matter and we are going to have to now go and talk to the international partners with whom we work, not least the government of the Netherlands. It now looks like this process will end up in the courts, he said.

Sigurdardottir said Iceland would now defend its case before the court of the European trade body overseeing Iceland's cooperation with the EU, the EFTA Surveillance Authority (ESA). Economists have said this route could be much costlier.

Economic Affairs Minister Arni Arnasson told the television he would be in touch next week with ESA, which said last year, in a first stage in legal proceedings, that Iceland should pay compensation to Icesave depositors.

ANGRY ICELANDERS

Icelandic lawmakers in February backed a repayment plan agreed with creditors, but the president refused to sign the bill, triggering the vote. In March 2010, Iceland rejected an earlier Icesave repayment blueprint in a referendum.

I know this will probably hurt us internationally, but it is worth taking a stance, Thorgerdun Asgeirsdottir, a 28-year-old barista, said after casting a no vote.

Svanhvit Ingibergs, 33, who works at a rest home, said: I had no part in causing those debts, and I don't want our children to risk having to pay them. It would be better to settle this in a court.

Iceland is still pulling itself out of the recession which hit it after its bank crash, and policymakers and economists have said solving the Icesave issue would help the country get back into international financial markets.

Getting such funding is also part of a plan to end the controls on capital flows it imposed in 2008 to stabilize a tumbling currency.

In our view it is unlikely that the capital controls will be fully lifted until the bulk of the Icesave debt is repaid, and the currency risk thus has been reduced, Islandsbanki economist Jon Bentsson said.

The controls have left an estimated equivalent to a quarter of Iceland's gross domestic product in the hands of foreign investors, many of whom are expected to want to pull out. Ratings agencies follow the vote closely. Moody's has said it may lower its credit rating on Iceland in case of a 'no'.

Standard & Poor's analyst Elieen Zhang said a 'no' vote might possibly result in a lengthy legal process and further uncertainties regarding the ultimate fiscal cost.

(Additional reporting by Sara Webb in Amsterdam and Avril Ormsby in London; Editing by Jon Hemming)

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