* EFTA says Iceland owes at least minimum Icesave guarantees
* Icesave talks with Britain and the Netherlands unresolved
* Bank crisis still haunts Iceland's state budget
(Adds Dutch reaction)
By Justyna Pawlak
BRUSSELS, May 26 (Reuters) - Iceland should ensure that Dutch and British investors in failed bank Icesave receive at least minimum compensation for lost deposits, a European trade body overseeing Iceland's cooperation with the EU (EFTA) said on Wednesday.
The British and Dutch governments paid out billions of euros to depositors whose funds were frozen in failed online Icelandic bank Icesave. The two countries have held so far unsuccessful talks with Iceland on being repaid for footing the compensation bill.
The EFTA Surveillance Authority said in a letter of formal notice, the first stage in legal proceedings that can end up in court, that Iceland had breached relevant directives in treating Dutch and British depositors differently from those in Iceland.
Under the terms of Iceland's participation in the European Economic Area Agreement, the country is required to provide compensation of at least 20,000 euros ($24,570) per deposit, it added.
"Iceland ... (is) under obligation to provide the minimum compensation," the authority added in a letter to the government of Iceland, which has applied to join the European Union.
The authority also noted that talks with the Dutch and British were taking place and that if a solution was found then it would not need to take any further action.
The authority said Iceland had argued that setting up a guarantee scheme was enough to fulfil its obligations.
Iceland's government also argued that a major bank crisis could mean the deposit guarantee directive was not applicable.
"The Authority disagrees on both points," it said. Iceland had two months to respond to the warning, the authority said.
"This is important. It is the start of a process which could end up before the EFTA court," Economics Minister Gylfi Magnusson was quoted as saying on the Website of Icelandic newspaper Morgunbladid.
He said Iceland still wanted a solution to its dispute with the British and the Dutch. "We will continue our efforts to bring the Dutch and the British to the negotiating table but they have been reluctant to do so in recent weeks," he said.
He said little had been heard from the new British government on the issue, although there had been contacts between the two governments before and after the UK election.
He said he was disappointed the ESA did not support Iceland, but expressed optimism the dispute would not end up in court.
Talks with the Dutch government should pick up after an election there in early June and a spokesman said Wednesday's ruling was in line with Amsterdam's expectations.
"The Netherlands has consistently argued there were obligations and it therefore welcomes the decision. We trust that this will contribute to a timely solution of the Icesave issue," he said. (Reporting by Justyna Pawlak, Bate Felix and David Brunnstrom in Brussels, additional reporting by Patrick Lannin in Stockholm and Omar Valdirmarsson in Reykjavik; Editing by Stephen Nisbet)