Britain has welcomed a breakthrough in the £2.3bn dispute with the Icelandic government over the collapsed IceSave bank.
Reykjavik announced a new draft deal on repaying the cash spent by the government on compensating tens of thousands of UK savers after the 2008 collapse.
Under the terms of the proposal - which most be approved by Iceland’s parliament and signed off by the UK and the Netherlands, which is also owed money - repayments must start by 2016, at an interest rate of 3.3%, and be completed by 2046.
Talks resumed in July after collapsing earlier this year following the rejection of a previous repayment agreement by Icelandic voters in a referendum.
A Treasury spokesman said: “The UK welcomes this new proposal from Iceland on IceSave and looks forward to successfully resolving the issue by signing a new loan agreement.
“Mutually-satisfactory closure of this issue will mark a new chapter in UK-Iceland relations.”
Chancellor George Osborne said he believed the coalition had smoothed the way to a fresh deal by dropping British threats to oppose Iceland’s EU membership application.
Speaking to reporters shortly before the new deal was announced, he said: “The previous government had made almost no progress.
“We have adopted a different approach to this. We have, for example, stopped blocking Iceland’s application to join the European Union because I think that helped clear the air.
“But it is also clear that they cannot complete those negotiations without resolving this issue.
“It is not just us, by the way - the Dutch are involved as well.
“I think this has led to a much more constructive relationship between the Icelandic government and the British Government, which was pretty glacial, frankly.”