* First step towards membership talks
* Iceland well placed for quick entry
* Must resolve banking, fisheries issues
By David Brunnstrom
BRUSSELS, July 24 (Reuters) - EU states will set Iceland on the road towards the European Union on Monday by asking the EU executive to assess how well prepared the country is to begin membership negotiations.
Iceland applied to join the 27-nation European Union last week months after a meltdown of the north Atlantic island's economy amid the global financial crisis.
EU foreign minsters will ask the European Commission to prepare an assessment on how well prepared the country is to become a formal candidate for EU entry and start negotiations, according to a draft statement obtained by Reuters.
EU entry negotiations typically take many years, but Iceland is well placed for quick accession because of its long democratic tradition and membership of the European Free Trade Association and European Economic Area trading groups, meaning it is already in line with most conditions for joining.
If its voters agree to seek membership in a referendum and talks go well, political analysts say Iceland could join by July 2011, although its path to Brussels may not be entirely smooth because of differences over fisheries and disputes with some EU states over accounts in failed Icelandic banks.
European Commission officials said it was unclear how long it would take for the executive to give its assessment, but diplomats said the fastest it had been done was 14 months.
"In the case of Iceland it is probably feasible in a shorter period of time," a Commission official said."I would say it will go faster than what we foresee for the western Balkans."
BALKAN CONCERN
Iceland's application has raised some concern among EU aspirants in southern Europe that it could leapfrog them to become the next EU member, slowing reforms and fuelling discontent with their accession processes.
Albania submitted its EU application in April, but it has yet to be considered by member states, given concerns about the conduct of recent elections and opposition to EU enlargement in some member states.
Ministers on Monday will reiterate the membership perspectives of all the countries of the Western Balkans and stress that they will attend to Albania's application once its election procedures have been completed.
Iceland's foreign minister Ossur Skarphedinsson said on Thursday he was confident parliament would soon pass a bill to guarantee repayment of money lost in Icelandic accounts to Britain and the Netherlands.
Reykjavik agreed in June to reimburse the two countries for compensating people holding so-called Icesave accounts, but the bill in parliament could leave Icelandic taxpayers footing much of the cost and is widely unpopular among voters.
Joining the EU would require Iceland to sign up to the bloc's centralised fisheries policy and cede control of waters teaming with cod, haddock and herring. Icelandic officials have said they could seek some flexibility since its territorial waters do not border those of any EU member state.
Diplomats say Iceland would also have to be in line with rules banning whaling in EU waters.