Iceland is to repay the Netherlands and Britain the full amount that they advanced to their citizens who lost money in the failure of the Icelandic bank Icesave, the Dutch finance ministry says.
It says the repayments will begin in July 2016.
"There will be a full reimbursement of all the amounts pre-financed by the Netherlands and Britain ... to compensate national depositors in Icesave," Dutch Finance Minister Jan Cees de Jager said in a letter to the lower house of parliament on Thursday.
The agreement, worked out in talks in London on Wednesday among the three countries, calls for the Netherlands to receive a total of 1.3 billion euros ($A1.76 billion), with an interest rate of three per cent.
The finance ministry did not specify the amount to be paid to Britain.
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In London, a treasury spokeswoman said that Britain "welcomes this new proposal from Iceland on IceSave and looks forward to successfully resolving the issue by signing a new loan agreement with Iceland.
"Mutually satisfactory closure of this issue will mark a new chapter in UK-Iceland relations."
Britain and the Netherlands held intense discussions with Iceland ahead of a March 6 Icelandic referendum on a deal under which Iceland would repay the two countries 3.9 billion euros ($A5.3 billion) to compensate for money they paid to 340,000 of their citizens hit by the collapse of the online Icesave bank in October 2008.
However, after more than 93 per cent of Icelandic voters rejected the deal to repay the money by 2024 at what was widely considered a high interest rate of 5.5 per cent, the talks stalled.
The dispute is considered a major sticking point as Iceland begins negotiations to join the European Union.
