Talks between Iceland, Britain and the Netherlands over repayment of 3.8 billion euros of debt have broken up without agreement.
A national referendum on an existing repayment plan is due to be held on Saturday.
The BBC reports Icelanders are likely to cast a heavy vote against.
The Icelandic government had hoped to avoid the referendum by agreeing a new repayment plan before the weekend.
Talks between the three countries are expected to continue next week, but not before the referendum is held.
A 'no' vote could jeopardise loans from the International Monetary Fund and other countries.
Britain and the Netherlands want the money as repayment for bailing out depositors in an online bank, the Icesave, which folded in 2008 under the global financial meltdown.
But Icelanders feel the repayment terms of the existing deal are too onerous and should be rejected because they are being penalised for the mistakes of the banking industry.
Opinion polls suggest more 75% of Icelanders will vote 'no' on Saturday.
The repayment plan was approved by the Reykjavik government last December. But it was blocked by President Olaf Ragnar Grimsson in January, sparking the referendum.
The dispute has also overshadowed an application by Iceland to join the European Union, which was submitted in July last year.
