The president of Iceland blocked a $5 billion compensation deal with the British and Dutch governments on Tuesday, upending the precarious finances and politics of the island nation and further jeopardizing already frayed ties with Europe and international lenders.

In a televised speech, the president, Olafur R. Grimsson, detailed his opposition to the $5 billion compensation deal. His decision means that the measure will be submitted to a referendum, even though recent polls show that 70 percent of the population opposes the bill. Some 60,000 people in Iceland  one-fifth of the population  had signed a petition against the bill, which was presented to the president last week.

Its rejection would force Iceland’s increasingly shaky left-wing coalition to reopen negotiations with the British and Dutch governments  both of which have taken a hard negotiating stance.

Icelandic banks were aggressive investors in Northern Europe, luring depositors with high rates. But short-term financing for the highly leveraged institutions dried up when the credit crisis hit.