A £2.35bn agreement to pay back the British government after it stepped in to guarantee UK deposits following the failure of online bank account Icesave has split public opinion in Iceland ahead of a critical referendum this week.

Iceland goes to the polls on Saturday over the Icesave settlement after opposition to the agreed deal prompted president Ólafur Grímsson to call a plebiscite. He took the unusual step despite the agreement having been passed by the Icelandic parliament.

Latest indications suggest a narrow but shrinking majority in favour of the latest agreement, with 55% of voters who have made up their minds intending to back it. A significant proportion are yet to make up their minds. The agreement offers Iceland less severe loan terms than a previous proposed settlement but is still unacceptable to many Icelanders. The earlier agreement was rejected by more than 90% in a similar vote 13 months ago.

Frosti Sigurjónsson, an internet entrepreneur and leading "no" campaigner, said: "It is going to be very, very close. We have 45% at the moment but we are hoping perhaps, when it comes to turnout, people who don't want to pay are more motivated than those who want to open their purse."

He claimed voters were becoming increasingly emboldened, despite the prospect of a jump in Iceland's cost of borrowing because of probable credit rating downgrades. "In the beginning there was a lot of fear. People felt, although the agreement was not great for them, not to say 'yes' would mean something terrible would happen. That's just not the case."

Landsbanki, the bank behind Icesave, failed at the height of the international banking crisis in October 2008 along with much of Iceland's over-heated financial sector. The meltdown left the island in effect bankrupt, forcing it to seek a bailout from the International Monetary Fund.

Under pressure from the British and Dutch, bailout loans required Iceland to accept some taxpayer liability for Icesave deposits from overseas. The two government's had stepped in to guarantee their domestic retail depositors with Icesave after a run on savings. Savers had feared – rightly, it turned out – that Landsbanki was heading for bankruptcy and an Icelandic guarantee fund could not meet its promises.

Web pages had told UK savers: "You can also rest assured that with Icesave you are offered the same level of financial protection as every bank in the UK." As a result, retail depositors, charities, councils and other public institutions, lured by market-beating interest rates, poured £4.52bn into Icesave before Landsbanki went bust.

Of these, the UK Treasury ended up guaranteeing in full deposits from 229,000 retail savers. Britain then effectively billed Iceland £2.35bn plus interest for a the partial guarantee that had not been honoured.

The British government – and Dutch counterparts who agreed a £1.3bn settlement – are believed to be dreading a "no" vote, which would probably see the dispute thrashed out in court under the auspices of the European Free Trade Agreement (EFTA) authorities.

Many in Iceland believe a court judgment could ultimately shatter the assumption at the heart of the Icesave settlement – that, under European law, a state must make up for any shortfalls in deposit guarantee funds.

A clear legal ruling on this point would be extremely unwelcome internationally as it would throw a spotlight on huge funding shortfalls in depositor guarantee schemes in Britain, the Netherlands and indeed around the world.

In May last year, however, EFTA's Surveillance Authority provisionally ruled that Iceland was legally required to stand behind its woefully underfunded guarantee scheme. Nevertheless, legal opinion remains split on whether such a finding could be challenge.

Sigurjonsson said: "The risk of accepting the current Icesave agreement [which involves an exposure to currency market movements and bankruptcy recoveries] is much greater than taking this matter to court, which is our civil right."