* Iceland submits EU proposal to parliament
* Government aims to secure majority vote within weeks
* Prime minister sees painful budget decisions ahead
(Adds quotes on budget woes, details)
By Omar Valdimarsson
REYKJAVIK, May 25 (Reuters) - Iceland's government submitted a proposal to parliament on Monday to authorise the start of negotiations for membership of the European Union.
A spokesman in the prime minister's office told Reuters the first round of debates on the proposal would probably take place this week and if the plan receives a majority backing, as expected, an EU application could be submitted as early as July.
Prime Minister Johanna Sigurdardottir separately told parliament Iceland faced more fallout from the crisis that devastated the island last year, a collapse that has prompted many residents to embrace the idea of joining the EU bloc.
Sigurdardottir said Iceland needs to tackle a 170 billion Icelandic crown ($1.34 billion) deficit between now and 2013. But even if the economy grows as hoped from the end of 2010, that would only reduce the shortfall by some 70 billion crowns.
"We only have several bad choices. This is a task that will affect everyone and these are without a doubt the hardest choices I will have to make in my political career," she said.
A politician whose popularity is based partly on her reputation as a caring leader, Sigurdardottir now has to prepare Icelanders for sharp budget cuts needed to get the country's fiscal house in order.
The economic warning comes as Sigurdardottir's Social Democrats are aiming to persuade their coalition partners, the Left-Greens, to support the EU plan -- or at least not get in the way.
The proposal calls for not only the start of talks but also an eventual referendum.
"The Althing (parliament) resolves to direct the government to submit a membership application to the European Union and that following negotiations with the union a national referendum be held on the membership treaty," the proposal said.
ECONOMIC MELTDOWN
Support for negotiations on EU membership, and ultimately adopting the euro currency, has risen following the economic meltdown that ensued after Iceland's banks all collapsed under the weight of massive debts.
Finance Minister and Left-Green leader Steingrimur Sigfusson has said he would not oppose the proposal and Icelandic media have speculated about half of the party could vote in favour.
Approval to join could take years, although some officials say membership could be achieved as quickly as 12 months since Iceland is already a member of the European Economic Area.
Once given a green light from the EU, Iceland would hold a referendum on whether to join. Polls show the Icelandic population is evenly split over the issue of actual membership.
Those in favour say membership would foster economic stability and reassure foreign investors. The crown has yet to regain its footing after it nosedived in October.
But Iceland's powerful fishing lobby has reservations. Joining would require Iceland sign up to the EU's centralised fisheries policy and cede control of waters teaming with cod, haddock, herring and other lucrative catches.
Icelandic officials have said they could seek some flexibility from Brussels for their fishermen since its territorial waters do not border those of any EU member state.