Icelanders will vote on April 9 on a plan to repay around $5 billion to Britain and the Netherlands to cover debts from the financial crisis, with popular backing key to keeping an economic recovery on track.
Iceland's president triggered a referendum when he refused this month to sign a bill setting out the terms of repayment that had been approved by parliament.
It was the second time he had vetoed a bill on the issue and Icelanders rejected an earlier deal after a referendum in March 2010.
The interior minister informed the cabinet this morning that he had decided the referendum will be held on April 9, the government said in a statement.
Britain and the Netherland's want the cash to cover payments they made to savers who lost money when Icelandic bank Landsbanki collapsed in late 2008.
The government says the new deal has much better terms than the old, and is keen to get a deal done. But many Icelanders still believe it is unfair that taxpayers must foot the bill for mistakes made by private banks.
An MMR poll published on Friday showed 61 percent of Icelanders who had made up their minds planned to vote yes in the referendum, while 39 percent opposed the deal.
The poll of 800 voters also showed 30 percent remained undecided. A previous MMR poll, carried out February 20-21, showed 58 percent in favor of the bill and 42 percent opposed.
Iceland's financial system collapsed in late 2008 when all its main banks folded in the global credit crunch. The island's currency dived and the economy went into a tailspin.
Output is seen expanding this year for the first time for two years, inflation is under control and the central bank has eased its core lending rate to 4.25 percent from a peak of 18 percent.
An agreement over Icesave, however, is seen as vital to further economic rehabilitation, particularly the removal of capital controls, put in place at the height of the crisis.
The Ministry of Economic Affairs said on Friday the Central Bank would deliver its proposals for removing capital controls next week.
It is expected that the cabinet will make a decision on the plan no later than 11 March and that the approved plan will be published the same afternoon, the ministry said in a statement.
Earlier this week, ratings agency Moody's said Iceland's sovereign debt rating could be downgraded if its voters rejected the new agreement, while a yes vote was likely to result in a raised outlook on the current Baa3 rating.
(Reporting by Omar Valdimarsson; Editing by Elizabeth Fullerton)