REYKJAVIK - Iceland announced Saturday it would repay 3.8 billion euros (S$7.79 billion) forked out by the British and Dutch governments to compensate those who lost money in the collapse of Icesave bank.

The Icelandic government said it would pay back £2.3 billion (S$5.43 billion) handed out to Britons who lost their savings in the bank's failure.

It will also return 1.2 billion euros to the Dutch government, who lent the sum to Reykjavik to pay for reimbursements to the bank's clients.

"I am pleased that we now have a result in the matter," said Iceland's Finance Minister Steingrimur Sigfusson.

"The freezing of assets will be revoked and normal relations will be re-established between Iceland and Britain. Nonetheless, the burden Iceland has to bear because of this will be heavy."

Iceland nationalised Icesave, a subsidiary of the country's second largest bank Landsbanksi, in October leaving more than 200,000 British savers and 120,000 Dutch clients cut off from their money.

Icelandic assets in Britain were frozen in response.

The deal was confirmed by the British Treasury and the Dutch finance ministry.

"The government welcomes Iceland's commitment to recognise its obligations under the EC Deposit Guarantee Scheme to repay depositors in Icesave," said a spokesman for Britain's Treasury.

Under the agreement, the money will be treated as a loan to the Icelandic Financial Compensation Scheme, to be repaid to the British government over 15 years.