(Adds reaction, background)
By Omar Valdimarsson
REYKJAVIK, Nov 14 (Reuters) - Iceland's prime minister said on Friday a commission will look into membership of the European Union, the strongest signal yet that the island wants to help its stricken economy by joining the bloc it has so far shunned.
Prime Minister Geir Haarde also reported progress towards resolving a dispute that has held up billions of dollars of much-needed financial aid but conceded, "We're not there yet".
Haarde said his Independence Party would move forward a party conference scheduled for October 2009 to January of next year to discuss the issue of EU membership.
Joining the 27-nation bloc is a prerequisite for adopting the euro, a concept which has gained favour on the island after the Icelandic crown and wider economy collapsed last month.
"We have always said that we will assess at any given time how we cooperate with Europe," Haarde told a news conference after a party meeting. "This process (the committee and party conference) will help us make our future decisions."
Haarde himself has long been opposed to joining the EU and the country has been divided over the issue. Iceland's powerful fishing community has feared EU regulations could hurt fishermen and the country is known for its fiercely independent streak. But the crisis, which has affected virtually everyone in the country, has changed all that. One recent poll showed 70 percent favoured membership.
Haarde's coalition allies in the Social Democratic Alliance have been more enthusiastic about the EU and the euro.
Industry Minister Ossur Skarphedinsson, a Social Democratic Alliance member, said the announcement appeared to signal a sharp reversal of Independence Party policy.
"This is the best news I've had for a long time," Skarpheninsson was quoted as saying on the website of daily Morgunbladid.
"I welcome that and believe that it would be of great benefit for Iceland if they (the Independence Party) take a forward step similar to the one we have done ourselves."
The European Commission was not immediately available for comment, while a French EU presidency official said the issue of Iceland's accession "has not been discussed".
Brussels said previously negotiations with Iceland are the same as any other country, but theoretically speaking, could go quickly as the country has adopted many EU laws already.
DEPOSIT ROW
Paul Rawkins, senior director in Fitch rating agency's sovereign team in London, said any moves toward EU membership were positive but not enough for a ratings upgrade.
also said the country faced a bleak future if it did not secure a deal from the International Monetary Fund (IMF).
The IMF's executive board has held off considering a $2 billion loan for Iceland while a row over frozen bank deposits has simmered. Haarde said Iceland hoped the IMF board would consider its application soon after the weekend.
The prime minister said the country was working on a negotiated settlement on "Icesave" accounts at Landsbanki, which, like other Icelandic banks, was taken over by the state when the global crisis made it unable to meet obligations.
Thousands of British and Dutch savers have not been able to access deposits in the Icesave accounts, sparking a thorny row with Britain and the Netherlands.
Britain responded by seizing Landsbanki assets using anti-terrorist legislation, prompting outrage in Iceland.
"We're getting closer to a solution but we're not there yet," Haarde said.
There was little doubt Iceland remains upset over the feud.
Haarde said the British airforce would not be deployed in Iceland next month to protect the island's airspace as part of a previously planned NATO rotation.
"This is a NATO decision and probably an appropriate one given the circumstances," Haarde said.
Iceland's foreign minister, Ingibjorg Gisladottir, added, "We know the general feeling among the public and we of course told them (NATO) about this and they made a decision after these consultations." (Additional reporting by Darren Ennis in Brussels, David Brunnstrom in Nice and Peter Apps in London; Writing by Adam Cox; Editing by Louise Ireland)