By Omar Valdimarsson
REYKJAVIK, April 30 (Reuters) - Iceland's Social Democrat prime minister has been unable to reach agreement with her potential Left-Green coalition allies on joining the European Union so far but hopes to find an amicable solution.
Prime Minister Johanna Sigurdardottir's Social Democratic Alliance won the election on Saturday and is coalition talks with the anti-EU Left-Green party, with which it ran a caretaker government after protests toppled a centre-right administration.
The new government inherits an economy in the grip of a sharp slowdown with analysts expecting a contraction of up to 10 percent this year after Iceland's banks collapsed in 2008.
The banks were taken over by the government, which also had to agree to painful reforms under a $10 billion bailout plan led by the International Monetary Fund (IMF).
For the prime minister the way out of the crisis is to join the EU but her potential coalition partners, which would give the new government a slim majority, oppose EU entry.
"Over the last few days we have gone very carefully over all aspects of this (the EU issue) in order to find a solution that will be acceptable to both partners," she told Reuters in an interview late on Wednesday.
She said the Left-Greens wanted a double referendum: first on starting membership talks and then on joining on the EU.
"I must admit that I've not heard of this approach anywhere else. We are making progress but we don't have a solution yet," said the 66-year-old veteran of Icelandic politics.
Failure to agree on an EU strategy would jeopardise the coalition.
"However, that's not in the cards at the moment, we are sitting around the negotiating table seeking a solution."
"This is such a priority for us that we simply must find an amicable solution," she added.
Opinion polls show Icelanders are split on joining the EU.
Sigurdardottir also eventually wants to replace the Icelandic currency, the crown, with the euro.
As a result of the sharp economic slowdown unemployment has already risen to near 9 percent, a high figure for the small country of 300,000 people. Many Icelanders also fear of losing control of their vital fishing stocks.
"The overall framework is such that I see no reason to fear that we'd be losing control of our natural resources by joining the European Union."
Under the terms of the IMF programme, the new government must also make tough decisions on raising taxes and cutting spending in order to reduce a surging budget deficit.
It also has to restructure the collapsed banks. (Writing by Patrick Lannin, Editing by Richard Hubbard)