REYKJAVIK - Iceland's president rejected a bill to repay Britain and the Netherlands more than $US5 billion ($A5.5 billion) their savers lost when Icelandic banks collapsed, forcing a referendum on the issue and threatening vital economic aid. . .

Britain warned Icelanders that if they rejected the bill, the north Atlantic island with just 320,000 people faced financial isolation.

"The Icelandic people ... would effectively be saying that Iceland does not want to be part of the international financial system," Financial Services Minister Paul Myners said. . .

Rating agency Fitch reacted to Mr Grimsson's decision by downgrading Iceland's long-term foreign currency issuer default rating to "junk" status with a negative outlook.

Standard & Poor's followed up saying Mr Grimsson's decision could lead it to cut, by one or two notches, its current BBB-minus rating to "junk" status, citing the political uncertainty and external liquidity pressures.

The next tranche of a €1.8 billion ($A2.84 billion) loan from Iceland's Nordic neighbours is also likely to be delayed, a Finnish official said. 06-Jan-10.

http://www.reuters.com/article/idUSLDE6040YB