REYKJAVIK (Reuters) - Icelandic President Olafur Ragnar Grimsson, who twice called a referendum to bring down a debt settlement deal with the Netherlands and Britain, said on Sunday he would step down this year after 16 years in office.
Grimsson said in his yearly televised New Year address that he would not run for re-election in May.
One of the president's few formal powers is to refuse to sign a bill passed in parliament, which must then be put to a referendum. Grimsson is the only Icelandic president to have used the power.
In March 2010 and then again in April 2011, Icelanders voted to rejected bills intended to settle debts owed to Britain and the Netherlands as a result of the 2008 financial crisis, when British and Dutch savers had money in Icelandic accounts frozen.
"It is clear that both referendums gave the people of this country increased self-confidence, showed the way to increased democracy, and drew the attention and even the admiration of other countries," Grimsson said in a later statement.
Nevertheless, the "Icesave" dispute has held back Iceland's economic recovery from a catastrophic banking collapse and cast a shadow over its application to join the European Union, on which negotiations started in June.
All of Iceland's top commercial banks collapsed within a week in 2008, sending its currency and economy into a tailspin.
Strict capital controls have held up new investment and the economy remains fragile.
The estate of the collapsed Landsbanki made a first payment to the creditors last month and says the deposits will be repaid in full. However, the EFTA Surveillance Authority, which oversees Iceland's cooperation with the European Union, says it will take Iceland to court to try to force faster repayment.
Grimsson's announcement follows a reshuffle of the centre-left government on Friday after traditional end-of-year talks between the government and the president.
(Reporting by Omar Valdimarsson; Writing by Anna Ringstrom; Editing by Kevin Liffey)