REYKJAVIK (AFP) - The breakdown in talks on how Iceland should compensate Britain and the Netherlands for money lost in the collapse of an Icelandic bank has put pressure on Iceland's already weak credit status, ratings agency Moody's said.

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Reykjavik's failure "to resolve the Icesave dispute puts the Icelandic government's BAA3 rating under downward pressure," Moody's said in a statement.

"This is because Moody's believes the failure to reach a new agreement is likely to lead to an extended delay of the IMF (International Monetary Fund) programme, a weaker economic recovery and potentially, political instability," it said.

"Overall, Moody's believes that Iceland's path out of the crisis now appears more difficult."

The Icelandic finance ministry on Thursday announced the collapse of talks in London on how Reykjavik should reimburse Britain and the Netherlands for having compensated 320,000 British and Dutch savers who lost money when the online Icesave bank failed in October 2008.

Icelandic President Olafur Ragnar Grimsson has refused to sign legislation approved by parliament that would pay the two governments 3.8 billion euros (5.2 billion dollars) to cover their reimbursements.

Grimsson instead referred the issue to a referendum, citing public opposition, and opinion polls are predicting the legislation would be rejected.

The Icelandic government has for weeks been attempting to find a way to avoid the referendum, which could prompt political turmoil and shake the country's already fragile economy.

Following the failure of Thursday's talks however, the March 6 referendum will most likely go ahead.

"A 'no' vote in the referendum may prevent access to significant external liquidity ... as Britain and the Netherlands have been blocking progress on the IMF programme pending a resolution of the Icesave dispute," Moody's said.

The reference was to a 2.1-billion-dollar International Monetary Fund rescue package aimed at helping Iceland back on its feet after its economy crumbled in October 2008.

The Icesave debacle would likely complicate Iceland's path out of the crisis, the rating agency said.

"The possible emergence of political instability following the referendum could prevent the government from returning its attention to such important domestic matters" as "substantial fiscal tightening" and bringing "the deficit under control and (reducing) the debt service burden to a manageable level," it stressed.

And although Iceland's economy had performed better than expected in 2009, Moody's said it did not expect the country to make a "robust recovery" until 2012 or even later.