REYKJAVIK (AFP) - Rating agency Moody's lowered its outlook on Iceland's debt to "negative" from "stable" on Tuesday, citing uncertainty over a compensation deal for the failed Icesave bank.

• Iceland: Difficult to relaunch Icesave talks

"The recovery of the Icelandic economy is threatened by the delays in the resolution of the Icesave dispute, which constitutes an obstacle in the resumption of official and private financial flows into the country," Moody's analyst Kenneth Orchard said in a statement.

Moody's currently has a BAA3 rating on Iceland's debt, or the lowest level of investment grade, and any downgrade would lower the rating to "junk" status.

The rating agency had cautioned at the end of February that Iceland's investment grade status was "under downward pressure" due to the Icesave difficulty, but said at the time its outlook remained stable.

In a March 6 referendum, more than 93 percent of Icelandic voters rejected a deal to repay Britain and the Netherlands 3.9 billion euros (5.3 billion dollars) to compensate them for the money they paid out to 340,000 of their citizens hit by the fall of the online Icesave bank in October 2008.

The conflict has led Britain and the Netherlands to block approval for further installments from the International Monetary Fund of a 2.1-billion-dollar loan to Iceland, of which half remains to be paid.

The IMF board, where Britain and the Netherlands have a vote, said last week it would ask its members to give the green light for a second review of the delayed installment of the Iceland loan, but said there was no guarantee member states would agree.

Iceland officials have warned that if the loan continues to be blocked, Iceland's recession could deepen this year.